Profitability of Commercial Loans at Banks Affected By Easing of Lending Standards
Profitability of Commercial Loans at banks
When issuing a commercial loan, your costs to originate and service the loan are the same, regardless of the principle amount borrowed. Your ability to earn a profit for your organization is therefore most dependent upon the actual terms of the loan. Another factor that is often overlooked but can affect your ability to offer profitable loans at attractive prices, is the amount of competition that you face from other lenders.
In general, as the level of competition for high quality commercial loans rises among lenders, many will be forced to offer loan prices and terms that are less profitable for their institution as they begin to ease their lending standards. This leads to even more competition and can indirectly decrease the Profitability of Commercial Loans at banks. Economic and financial data from the first half of the year all currently point to a market where competition is growing and making it difficult for banks and other lenders to be able to continue to price loans at terms that will be profitable for their organization.
According to the U.S. Small Business Administration’s Quarterly Lending Bulletin for the 2015 First Quarter, demand for Commercial Real Estate (CRE) loans and Commercial Industrial (CI) loans are beginning to increase over last year as both traditional big bank and alternative lenders are reporting a general easing of their standards and an increase in demand for commercial loans.
This trend for greater demand and increased competition has continued in the second quarter according to data reported in the Federal Reserve’s July 2015 Senior Loan Officer Opinion Survey on Bank Lending Practices which found that commercial loan demand is still growing while lending standards ease and competition continues to increase. According to the report, this trend was true for both CI and CRE loans and across all types and sizes of lenders.
What does this trend of easing lending standards and increased market competition mean for you, the lender? It means that now, more than ever, you need a fast and reliable way to be able to easily scale loans throughout your loan portfolio.
It also means that you need a way to be able to easily see at a glance how just slight changes in loan terms and prices will affect loan profitability for your organization. In such an environment, you truly need a loan pricing model that makes it easy to find the “sweet spot” of maximum profit at competitive terms.
If you’re already beginning to feel the squeeze from an increasingly competitive market, contact us today and ask how the PULPS loan pricing model can help you gain a competitive advantage and preserve your ability to issue loans at a price that preserves your profitability!