Through the Cycle: How to Identify the Best C&I Lending Opportunities in Challenging Times
Buczynski, Rick, The RMA Journal
Markets can remain irrational longer than you can remain solvent.
John Maynard Keynes, British economist (1883-1946)
As of this writing in early September, there is no beacon to light a clear course through stormy economic seas. The financial markets continue to ebb and flow on the unpredictable tides of good and bad economic news. Consumer confidence remains weak and fragile. Households are tightening their belts and working off their heavy debts
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Keynes's "paradox of thrift" warns us that starving this financial fever may just leave us all dead from hunger. Still, it is not bad news, just a necessary adjustment to the over-leveraged spending spree that was a key factor in the euphoric run-up of household debt, a harbinger of the Great Recession (Figure 1).
Business investment and private-sector job creation, both necessary catalysts for a solid, sustainable recovery, seem trapped in a maelstrom of uncertainty despite generally strong profits and a corporate America awash in cash. Profits have been robust, while the national unemployment rate remains stubbornly high (Figure 2). The unemployment numbers (14 million) underestimate the underemployed (8.8 million part-time workers seeking full-time work) and discouraged workers (those who have dropped out of the labor market, probably another 6 or 7 million people).
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Unlike the fiscal stimulus provided by the American Recovery and Reinvestment Act of 2009 (ARRA), federal, state, and local governments are facing the prospects of unprecedented austerity as the debate to contain growth of public debt has taken center stage (Figure 3).
President Obama's recent job creation initiative is a step in the right direction, albeit a small one given the dearth of fiscal ammunition the administration needs to prime its governmental guns. To be sure, traction will clearly have to come from the private sector as U.S. policy makers have yet to find the Holy Grail that will pull the U.S. out of the malaise.
Compounding jitters are problems brewing overseas, including China's fight to control inflation and the European Union's struggle to contain the region's sovereign debt crisis.
According to September's National Association of Business Economists survey, GDP growth this year will be a paltry 1.7% and will then accelerate slightly to 2.3% in 2012. These forecasts are down 1% from the May survey Unquestionably, the likelihood of a deleterious double-dip recession has increased.
So ... Where Do We Go from Here?
An article in the December 2009-January 2010 RMA Journal (1) offered some suggestions for finding solid C&I lending opportunities, which may be worth rereading since much of that analysis remains relevant. As underscored above, however, the economic landscape has changed dramatically and several of IBISWorld's banking clients recommended that we revisit the topic.
Obviously, this article can't possibly delineate all of the lending opportunities or risks. Nonetheless, its aim is to provide some insights and, in particular, offer a methodology for seeking sensible opportunities. Our criteria will identify sectors that:
* Are in the growth phase of their industry life cycle and are well positioned to take advantage of a sustained, if not spotty, economic rebound.
* Do not present inordinate risks should a double-dip recession or shallow growth path result.
* Are not excessively volatile.
* Possess some attractive attributes regarding the level of competition and barriers to entry (based on the work of Anita McGahan and Michael Porter (2)).
* Are capital-intensive, implying a large borrowing capacity.
* Can be potentially targeted as small business or mid-market clients.
* Have strong growth potential over the next five years. …