Page 27 - Oil and Energy January 2013

January 2013 • 27
Banking
By Matthew Ide, Angus Energy
“Banks of all sizes, including smaller
community banks, remain plagued by a conflu-
ence of factors that are eating away profits.
Quality loan demand is weak. Net interest
margins are compressed at their lowest level
in three years. New regulations have reduced
fee income and increased compliance costs.”
–American Banker Magazine
THE ABOVE DOESN’T SOUND SO GOOD FOR
getting banks to open up their vaults and
loan money to fuel dealers. So how can
this be an opportunity for your company
to obtain financing? It’s what is going on
beneath the surface that is surprising – and
good news for dealers. How can this be?
A CITY IN SWITZERLAND,
CONGRESS AND A SLOW ECONOMY
On the heels of the global financial
crisis, financial policy makers from around
the world met at a series of conferences
in the Swiss city of Basel. Spawned from
these conferences is a series of international
agreements that are designed to stabilize
the global banking system by strengthening
banks’ capital positions, reducing risky
credit behavior and making the overall
assessment of credit risk and collateral
value more transparent.
Today the Federal Reserve and other
agencies that regulate our banking system
have issued rules to implement what is
commonly known as “Basel III”. While this
was going on, the U.S. Congress passed
the “Dodd-Frank” law that added financial
reforms with levels of compliance and regu-
To offset these less profitable loans
banks are aggressively looking to lend to
commercial and industrial customers like
fuel dealers, which under the new rules
have a different risk profile and have
different capital requirements. Growing
this “C&I” business is a key profit objec-
tive for many banks.
Evidencing this is a recent report
issued by the Connecticut District Office
of the SBA noting a 64 percent increase in
the number of Small Business Association
(SBA) guaranteed loans made by banks
in Connecticut for the month of October
compared to a year ago. “An October 2012
survey of 1,000 small business loan appli-
cations by Biz2Credit.com, a portal that
connects borrowers with lenders, found
that only 15 percent of such applications
were approved by big banks. By contrast,
small banks approved 50 percent of
small business loan applications,” wrote
American Banker Magazine.
This evidence confirms what I have
experienced this year with client compa-
nies who have successfully received bank
financing to support acquisitions and
provide working capital. The message is
clear! Banks are looking for and need to
make profits by making loans to quality
commercial and industrial customers as a
reaction to current regulatory changes.
HOW CAN MY COMPANY BENEFIT
FROM TODAY’S LENDING CONDITIONS?
Banks are very aggressive when they
spot a quality commercial customer in
lations designed to curtail risky banking
practices. The economy, while out of reces-
sion, continues at a slow pace of growth
evidenced by the Thomson Reuters/PayNet
Small Business Lending Index dropping to
its lowest number in more than a year this
fall. So again, how can this be good for fuel
dealers getting loans?
BANKS NEED TO MAKE MONEY
When you drill down to the core impact
that all these new rules and regulations have
on banks, especially smaller local banks,
you find it all boils down to the amount of
capital banks are required to hold to cushion
themselves from loan losses. The Basel III
processes and formulas that are used to
calculate the amount of capital a bank needs
to hold creates major disincentives to make
loans to certain customer segments.
Right now many banks have to increase
the amount of capital required to hold in
reserve to make mortgages. This is because
under the new Basel III rules and the overall
sluggishness of the economy, combined
with the slow return of real estate values,
these loans are deemed much more risky
than regulators scored them in the past.
The current low interest rate envi-
ronment and additional capital reserve
requirements make these loans less profit-
able. Since a large percentage of most local
banks’ loan portfolios consist of mortgages
or loans collateralized by real estate, it is
costing banks a lot of money to raise capital
to support these loans. The additional
capital reduces profits.
Continued …