Business Finance Firms Gear Up to Battle Banks
Talley, Karen, American Banker
By KAREN TALLEY
Companies that court the business borrower may become more of a force for banks to contend with.
Associates First Capital, Heller Financial, and others are tapping Wall Street and the securitization market for growth capital to build their equipment lending and leasing businesses, a new study by BT Alex. Brown says.
The positioning could make these companies stronger competitors to banks that have long used commercial financing as a bread-and-butter business, said the report's author, Mark C. Albert.
"Commercial banks, by virtue of their deposit-gathering powers, have funding and leverage advantages over commercial finance companies," Mr. Albert said.
But "commercial finance companies are largely unregulated and can provide financing solutions that would never pass the scrutiny of bank examiners."
Finance companies also tend to gain long-term clients that banks shed when times get tough, he said.
Mr. Albert is not alone in his assessment. Chase Manhattan Corp. and Citigroup may not be significantly affected by this stronger group, said Gerald Lewis, an associate analyst with Stephens Inc., but regional banks will probably be hurt as these companies bulk up through public offerings and leverage their lending abilities by securitizing loans.
Investors have been attracted to commercial finance companies because they are viewed as a "flight-to-quality stock," said E. Reilly Tierney, an analyst with Fox-Pitt Kelton in New York.
These companies do not experience the volatile loss rates that consumer finance companies have, Mr. Tierney said. Many consumer finance companies that relied on securitization have suffered this year, as prepayment rates rose and markets for these securities dried up.
"These stocks are cheaper than bank stocks, and their earnings growth is much better," Mr. Tierney said.
The winning commercial finance companies will "choose endurance over wind sprints," Mr. Albert said.
Unlike subprime consumer lenders that suffered setbacks because of controversial accounting techniques, successful commercial lending companies "will have an established track record of growth and maintain accounting integrity" on their balance sheets and in their income statements, Mr. Albert said. "Recurring sources of income are worth more than 'gain-on-sale' income. …