Small Business Credit Outlook

Transcription

1 2015 Q3 Small Business Credit Outlook All s Well that Ends Well Shakespeare All s Not Well - Hamlet

2 Business Cycle As 2015 ends, it is easy to say all is well going into Lending activity stands strong, and credit risk remains low so we naturally believe these conditions will continue. The PayNet Small Business Credit Cycle shows strong expansion over the past year and credit risk did not budge. The immediate outlook for borrowing and defaults remains positive so all is well. We see very low credit risk, and the cycle is expected to remain firmly in expansion mode through Q The U.S. small business financials continue to look good. The longer-term view is that all may not be well. Given external factors such as geopolitical instability, the coming presidential election, and Federal Reserve actions, the environment for small business seems to be moving into uncertainty. This means small businesses are likely to hunker down. The impact on lenders will be slower use of credit and continued aboveaverage credit quality will look more like which provided lower investment, borrowings, and below average defaults for small business credit. Postpresidential election policies should provide more clarity and direction around which small businesses can plan and adjust their business models. PayNet Small Business Cycle 140 3Q Q07 1Q06 1Q CONTRACTION 1Q14 SBLI Originations Index Q10 1Q09 RECESSION 1Q08 1Q05 1Q11 RECOVERY 1Q12 1Q13 EXPANSION % 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0% SBDI Day Delinquency Index

3 Recent Investment Activity Small business credit took a surprise fall in October shifting back to the era of less risk taking following the Great Recession. Borrowing and investment by small businesses fell abruptly last month, and at the same time, the percentage of loans past due fell. Taken together, these conditions appear like the uncertainty of 2012 when small businesses held back on bold investments and undertook a derisking of their financial position. While October could be an outlier, it stands in stark contrast to the faster trend line for borrowing and investment over the past year. Many factors causing uncertainty have been cited above. Uncertainty is enemy number one for business and particularly virulent for the small business owner. Whatever the cause, this release marks a sharp pause in the expansion by small businesses, and this pause will bring slower GDP over the next quarter. The Thomson Reuters/PayNet Small Business Lending Index, which measures seasonally adjusted originations, decreased 5% from in September 2015 to in October Compared to the same month one year ago, the index is flat. This release marks only the second time the index has failed to increase over the prior year since February Furthermore, this release shows the rolling three-month index decreased 3% from September 2015, the second consecutive month of decline since March 2014, while the trend line yearover-year change slowed from 10% to 7% as compared to the same period one year ago. 150 Thomson Reuters/PayNet Small Business Lending Index (SBLI) (January October 2015) Index Value

4 Credit Risk Small business financial health remained strong with the Thomson Reuters/PayNet SBDI days past due constant at 1.19% in October However, loans past due remain muted and almost too much so. As compared to one year ago, delinquency stands 6 bps lower. This release represents the fifth consecutive month of year-overyear decreases after 12 straight months of increases. Several industries showed slight rises in delinquencies such as Transportation which increased 6 bps to 1.04% for the eighth consecutive monthly increase and its highest level since March Construction and Health Care delinquencies are both up 4 bps, to 1.67% and 1.21%, respectively. Loans severely past due show no signs of presenting immediate risk to bank s credit books. The Thomson Reuters/PayNet SBDI days past due remained unchanged at 0.25% in October 2015 from September 2015 which is at the level of last month s alltime low for the time series. As compared to one year ago, delinquency is down 17% (5 bps), the sixth consecutive month of year-overyear decline after 12 months without a decrease. Every industry segment was within 1 bp of its September 2015 delinquency except Transportation, which increased 2 bps to 0.24%, its highest level since February Thomson Reuters/PayNet Small Business Delinquency Index (SBDI) (31-90 Days Past Due) (January October 2015) 4% 3.5% 3% 2.5% Index Value 2% 1.5% 1% 0.5% 0% % 35% Thomson Reuters/PayNet SBDI Change vs. Year Prior (31-90 Days Past Due) (January October 2015)

5 Regional Credit Risk Regional credit risk reflects the same conditions as the past year lowest in the Midwest and highest in the Southeast. The Big 10 States by population display rising loan delinquencies but still much lower than all-time maximum rates. Ohio, Texas, and Michigan show loans days past due, up 8 to 20 basis points or approximately 11% over the same month of the prior year. These increases are segment driven. Ohio retailers exhibit rising delinquencies as do farmers in Texas and health care providers in Michigan. Retailers in Ohio show a surprising jump in past dues to 2.54%, about 25 basis points below the maximum for this region and sector. No other industry sector in the Big 10 States reports delinquencies within 50% of their maximum value which means strong finances for these states. PayNet Small Business Delinquency Index by State (31-90 Day) WA ME CA OR NV ID AZ UT MT WY CO NM ND MN SD WI IA NE IL KS MO OK AR MS IN MI TN AL KY OH GA WV PA SC VA NC NY VT NH MA RI CT NJ DE DC MD AK TX LA FL HI < 0.50% % % > 1.50%

6 Credit Risk Forecast Credit quality will remain above average into 2016 based on PayNet AbsolutePD forecast default rates. The historical default rate for all small businesses combined registered an all-time low of 1.5% in AbsolutePD forecasts a slight increase to 1.6% by year-end 2015 then through Rising interest rates, continued GDP expansion, and reversion to more normal defaults account for higher projected defaults. Credit quality still remains low relative to more normal times, and if you believe the next 12 months will dispel uncertainty, the corollary is that credit risk will remain low as well. Stress Scenarios reinforce the outlook for below-average credit risk in The Federal Reserve Board s Adverse Scenario reveals 2.1% defaults based on 8% unemployment and 1.5% GDP. FRB s Severely Adverse Scenario projects 2.6% defaults based on unemployment at 9.7% and GDP 3.9%. Historical And AbsolutePD Forecast Default Rates Industry Segment Actual Historical Default Rates (1) Forecast Default Rates (2) * 2016 Transportation 4.3% 6.4% 10.1% 12.4% 7.8% 4.2% 2.8% 2.7% 2.5% 2.3% 2.4% Information 3.5% 4.4% 4.9% 6.7% 3.6% 3.5% 2.9% 2.4% 2.2% 2.3% 1.8% Retail 2.5% 3.2% 4.4% 6.3% 4.3% 2.5% 1.9% 1.7% 2.1% 1.7% 1.7% Administrative Services 2.4% 3.1% 4.3% 6.1% 4.5% 2.7% 2.1% 1.9% 1.8% 1.5% 1.6% Health Care 2.5% 3.0% 3.7% 4.2% 3.5% 2.1% 2.0% 1.9% 1.8% 1.8% 1.7% Construction 2.7% 4.3% 6.7% 10.5% 7.5% 3.7% 2.2% 1.7% 1.6% 1.8% 1.9% Accommodation and Food 4.0% 5.1% 6.8% 7.7% 6.0% 3.2% 1.7% 2.0% 1.6% 1.9% 2.1% Professional Services 2.7% 3.5% 4.3% 5.3% 3.5% 2.4% 1.9% 1.7% 1.6% 1.7% 1.5% Manufacturing 2.1% 2.4% 3.3% 5.8% 4.1% 2.3% 1.6% 1.3% 1.5% 1.5% 1.4% Mining 1.0% 2.6% 3.5% 6.8% 4.8% 2.1% 1.8% 1.2% 1.3% 2.2% 1.8% Other Services 2.4% 2.7% 3.9% 4.8% 3.1% 2.1% 1.6% 1.3% 1.2% 1.3% 1.6% Wholesale 1.9% 2.1% 3.0% 4.2% 3.2% 1.9% 1.2% 1.1% 1.2% 1.2% 1.4% Real Estate 2.1% 3.2% 5.0% 6.6% 4.1% 2.5% 1.4% 1.3% 1.2% 1.1% 1.6% Finance 3.5% 7.5% 7.1% 5.8% 3.5% 2.0% 2.0% 1.4% 1.1% 1.3% 1.4% Entertainment 3.3% 3.7% 4.2% 4.2% 2.7% 2.3% 1.7% 1.3% 1.1% 1.0% 1.7% Education 2.4% 2.5% 2.8% 2.9% 2.0% 1.4% 1.4% 0.9% 1.1% 1.2% 1.8% Public Administration 2.5% 2.8% 1.9% 2.4% 1.6% 1.5% 2.0% 1.2% 0.9% 0.8% 1.6% Agriculture 2.0% 1.8% 1.8% 2.7% 2.3% 1.5% 0.9% 0.8% 0.9% 1.4% 1.4% ALL INDUSTRIES 2.6% 3.6% 4.8% 6.2% 4.2% 2.5% 1.8% 1.6% 1.5% 1.6% 1.6% Source: (1) PayNet Small Business Default Index (2) PayNet AbsolutePD $1.0mm or Less in Total Lease/Loan Exposure *2015 Forecasts Include 3 Quarters of Actual Defaults

7 Summary All s well that ends well applies to the small business credit market today, but all is not well over the next 12 months. Rising uncertainty will cast a pall over the U.S. economy and small businesses, which are even more susceptible and tend to hunker down in uncertain times. Uncertainty means tepid growth due to less risk taking and the desire to maintain strong financial health. October does not a trend make, but this release surprised on the low side, and it provides the sense that small businesses are either seeing less demand for their goods and services or becoming cautious about their future. For only the second time in the last 5 years, small businesses have failed to borrow and invest more over the prior year. We can blame a slowdown on any number of factors, but the bottom line is slower borrowing and investment by small business means slower GDP for the next quarter.

8 About PayNet, Inc. PayNet is the leading provider of credit ratings on small businesses enabling lenders to achieve optimal risk management, growth, and operational efficiencies. PayNet maintains the largest proprietary database of small business loans, leases, and lines of credit encompassing over 23 Million contracts worth more than $1.3 Trillion. Using state-of-the-art analytics, PayNet converts raw data into real-time marketing intelligence and predictive information that subscribing lenders use to make informed small business financial decisions and improve their business strategy. PayNet s small business capabilities range from historic credit-reporting and automated credit-scoring to detailed strategic business reviews that include portfolio risk measurement, default forecasting, peer benchmarking, and critical industry trend analysis. PayNet Contact Information PayNet, Inc Old Orchard Rd., Suite 300 Skokie, IL William Phelan President bphelan@paynetonline.com PayNet Risk Insight Suite PayNet, PayNet AbsolutePD, and PayNet Risk Insight Suite are registered trademarks of PayNet, Inc PayNet, Inc. Taking the Risk Out of Small Business Lending For more information please call (866) or visit sbinsights.net