Small Business Credit Outlook

Transcription

1 2015 Q2 Small Business Credit Outlook A Change Will Do You Good Foreign markets falling. The U.S. economy holding up relatively well due to the consumer. Technology radically changing entire industries with the emergence of innovators. A presidential election seemingly closer than November The small business credit market has sped up investing and strong financial health means that credit risk will stay at low levels through year-end 2015.

2 Business Cycle The business cycle sharply advanced in 2nd quarter this year. Q2 borrowings by small companies jumped 12% in the 2nd quarter over the prior year s quarter and 9% over last quarter. At the same time, financial health remained very strong. Taken together, the expansionary phase continued with very low immediate credit risks. Change is brewing, though as foreign markets slow, large companies struggle with changing business parameters, and technology drives new business models. This business cycle represents a longer than normal one. The current cycle has run 92 months from peak to peak. The average length for business cycles going forward from 1945 has been 69 months. Part of the current expansion cycle derives from the severity of the Great Recession. As many famous investors claim, business cycles must not die from old age. Although small business receives little direct sales from foreign markets, the interconnectedness of the U.S. economy to global markets will ultimately impact small businesses, and this will, in turn, affect the credit quality of small business debt. PayNet Small Business Cycle 140 2Q 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 The Thomson Reuters/PayNet Small Business Lending Index (SBLI) turned up nicely in Q2 reflecting stronger borrowing and investment by small companies. Small business remains a key U.S. economic engine while foreign economies have slowed down. The SBLI reached 143 representing a new all-time record since Borrowings and investment grew 9% over the previous month, and 19% versus the same month last year. The SBLI is now available by 18 major NAICS groups. This data indicates a shift underway from commodities to consumers. The Transportation (+22%), Accommodations & Food (+16%) and Construction (+10%) segments expanded the most versus last year on a national basis. Agriculture lags the most with a -18% change. The data shows small businesses engaged in more direct consumer activities. Consumers are traveling more, going out to dinner more, and remodeling their homes. States expanding the most are found in the Southeast while those in the Midwest are falling. Florida shows the highest growth while Illinois is decreasing the most. This represents a dramatic turnaround in the geographic economies. For the past 7 years, the Midwest has led economic expansion while the Southeast lagged, but the reverse is occurring today. Thomson Reuters/PayNet Small Business Lending Index (SBLI) (January June 2015) Index Value

4 Credit Risk Delinquency indices point towards continued strong financial health. In some sense, these low delinquencies indicate abnormal risk conditions. Loans 30 and 90 days past due have been at all-time low levels for almost 3 years. In the last credit cycle, the low point for delinquencies lasted for a far shorter time period of about 1 year. The trough in loan delinquencies occurred in mid-2005 during the last credit cycle. Delinquencies stayed at those levels for about 12 months through mid-2006 and then began the march upwards as the Great Recession started. In this credit cycle, loan delinquencies continue firmly at low levels. This is partly due to fear from the Great Recession, partly due to persistently low interest rates, and partly due to a sluggish economy. Any way one currently views low loan delinquencies, they signal exceedingly strong financial health with major doses of conservatism. Thomson Reuters/PayNet Small Business Delinquency Index (SBDI) (31-90 Days Past Due) (January June 2015) 4% 3.5% 3% 2.5% Index Value 2% 1.5% 1% 0.5% 0%

5 Regional Credit Risk Our newest index is the Small Business Default Index (SBDFi). This measures defaults of private small businesses at the national, state and industry levels. The data tells the story of more risk coming into the financial system. As we can see in the following chart, defaults of small businesses are rising in most of the biggest states. Small businesses in Michigan are showing a large increase of 17% over last year s rate of default. Illinois and Texas are also showing large increases in small business defaults. Florida, which was at ground zero for the Great Recession, is starting to exhibit rising defaults among small businesses. Georgia remains the only large state where defaults are still falling. When we dive into the industries in Georgia, we see within the overall falling default rate that the Farming and the Accommodation & Food sectors are registering defaults up 38% and 31% respectively. Small Business Default Index (SBDFi) STATE YoY Michigan 1.22% 17% Illinois 1.53% 8% Texas 1.96% 6% Florida 2.06% 4% Ohio 1.31% 2% Pennsylvania 1.37% 0% California 1.41% 0% Georgia 1.80% -15% Regional loan delinquencies tell a similar story the Southeast is improving but still represents the highest loan delinquencies of all parts of the country. Florida, Alabama, and Mississippi show the highest loan delinquencies of all states, while South Dakota and several central plains states show the lowest. 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 Defaults are forecasted to stay level in You may note a slight change in the historical default rates. This is due to new analytical capabilities to quantify defaults using indices technology. The Small Business Default Index (SBDFi) better represents the risk of small business loans as an asset class compared to other types such as mortgages, consumer, corporate, or high yield loans. PayNet AbsolutePD forecasts defaults to rise slightly to 1.6% by year end These higher default forecasts still stand lower than the historical average. We expect defaults will take about another 2 to 3 years to revert back to the normal levels of 2.5 to 3.0% that were usual for small business loans before the Great Recession. Historical And AbsolutePD Forecast Default Rates Industry Segment Historical Default Rates AbsolutePD Forecast Default Rates * 2016 Retail 3.0% 3.4% 4.6% 6.5% 4.9% 3.7% 2.0% 1.8% 1.5% 1.5% 2.2% Health Care 2.2% 4.1% 3.6% 3.7% 2.8% 1.9% 1.8% 1.4% 1.5% 1.6% 2.1% Construction 2.3% 3.6% 5.5% 8.8% 6.7% 3.2% 2.0% 1.4% 1.3% 1.6% 1.8% Transportation 2.9% 5.4% 7.8% 9.3% 5.8% 3.1% 2.1% 2.0% 1.7% 1.4% 1.5% Agriculture 2.3% 1.6% 1.8% 2.6% 2.6% 1.4% 1.0% 0.8% 1.0% 1.4% 1.4% General 2.3% 3.5% 3.7% 5.0% 3.1% 2.0% 1.4% 1.3% 1.5% 1.2% 1.4% ALL INDUSTRIES 2.5% 3.8% 4.7% 6.2% 4.2% 2.4% 1.7% 1.4% 1.4% 1.4% 1.6% For Borrowers with an Exposure Less than $2.5mm * 2015 Forecasts Include 2 Quarters of Actual Defaults

7 Summary Change is upon us. We live in an uncertain global world now. Small businesses remain an anchor of safety and steady growth at this time. Even if the Federal Reserve Board decides to raise interest rates, we will not see much of an impact on small private businesses. The reality is that they don t make decisions based on slight changes in interest rates. In addition, foreign markets do not significantly impact small businesses. We can infer from the data that the U.S. consumer is coming to life and spending more money. We also see added demand to create more factories and services by small businesses. Their financial picture is conservative at a time when debt is building up in other areas of the economy. Small businesses can be the anchor that generates consistent and low risk growth for some decent period of time. As a result of these factors, and absent some big unforeseen shock, the credit risk outlook for small businesses remains favorable and presents low financial risk to lenders over the next 6 months.

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 250 Skokie, IL William Phelan President [email protected] 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