Insight: Business spending raises U.S. bank hopes
(Reuters) - Two-and-a-half years after the official end of the recession, businesses are starting to invest cash again, prompting bankers to hope they might start borrowing, too.
Consider Jim Burg. It has been a year since steelmakers started having trouble finding trucks to haul loads for the reviving auto industry. So Burg, whose company is based in Warren, Michigan, is finally about to borrow money from a bank to build his fleet of flatbed rigs to 85 from 70.
But Burg is taking the step carefully. He accumulated far more cash reserves than he has ever had in his previous 28 years in business. He also lined up bank credit lines in excess of what he needs to operate.
"We put in a very conservative business plan," said Burg. "Look what happened in the second quarter of last year when the tsunami hit Japan. That affected us directly."
Burg's story is a common one that bankers say gives them at least a little hope. They expect investments like those Burg is making will drive the economic recovery and bring additional borrowing and interest income -- even as they recognize that in this day and age, businesses are mostly averse to debt.
"Companies are going to continue to increase productivity and generate cash," which they can use to build inventory, said Laura Whitley, commercial banking head at Bank of America Corp. "I do not necessarily see them borrowing."
NO BORROWING SURGE
While banks large and small are certainly making more business loans, they say most of the money has been borrowed to replace worn-out equipment or to refinance existing debt. Businesses generally have not been borrowing to grow, making people like Burg a notable exception.
Bankers and analysts say they do not see a big surge of additional borrowing in the near term, following the strong growth of the last three months of 2011, when business loans outstanding at U.S. banks increased at an annual rate of 13.1 percent, according to Federal Reserve data.
A portion of that growth came from U.S. banks taking market share from retreating European banks and from the corporate bond markets, not from additional borrowing. Also, some of the surge came from companies hurrying to take advantage of an expiring tax investment incentive, said Christopher Mutascio, a stock analyst at Stifel Nicolaus & Co.
Initial data since December points to slower loan growth, said Mutascio. That would be a disappointment to investors who had recently been bidding up bank stocks in anticipation of another strong step up in business lending, he added.
Meanwhile, companies continue to take in cash profits from their operations that they can invest instead of borrowing. U.S. businesses piled up a record $1.6 trillion in bank deposits and money market funds through the end of September, according to Federal Reserve data. Bankers say companies continue to add to their deposits.
"Corporate America built and continues to hold an extraordinary amount of cash," said Terry Turner, chief executive of Pinnacle Financial Partners Inc, a Nashville, Tennessee-based bank that specializes in commercial and industrial loans. "That serves as a damper on loan demand."
In Huntersville, North Carolina, engineering giant ABB Ltd of Switzerland is using its own cash this year to build a $100 million factory to make cables to transmit high voltage electricity, said Ismo Haka, the company's chief financial officer for North America.
ABB is keen on keeping debt low and cash high.
"It is much easier to go into a downturn with a strong balance sheet," he said. "It gives you the flexibility to make investments if growth opportunities come up."
HOLDING THE PURSE TIGHTLY
Bankers say business customers are asking them to fund only about 40 percent of money available under credit lines, which companies typically use to carry inventory and tide them over until they collect from customers. The 40 percent usage levels are about the lowest ever and far short of the 60 percent that bankers say businesses use during the best times.
Instead of tapping the lines, businesses are financing additional receivables and inventory with cash they have been earning, said Jim Dunlap, regional and commercial banking director for Columbus, Ohio-based Huntington Bancshares Inc and Burg's banker.
"They are funding themselves, but they still have their credit lines out there, at the ready," said Dunlap. Bank of America's Whitley said the same thing is happening with larger companies.
Unfortunately for the banks, the fees they receive for keeping credit lines open are small compared with the interest income they would earn from lending money.
Banks need more loan revenue now because older loans with relatively high interest rates are being paid off. At the same time, mounting deposits from businesses and individuals have left the banks with so much money to lend that they end up cutting rates to attract business.
Deposits continue to pile up faster than loans at banks. Industrywide, total loans to all types of borrowers equaled 83 percent of deposits in January, down from 90 percent a year earlier, according to Federal Reserve data.
EARLY SIGNS OF CONFIDENCE
Yet there are signs that the confidence to invest a portion of cash flow will eventually grow into confidence to borrow for additional investment.
"We're seeing companies thinking about things they haven't thought about in years," said Perry Pelos, commercial banking head at Wells Fargo & Co.
For example, Pelos said, a California manufacturer with facilities in China is thinking about spending to bring some production back to the United States.
"That is the first time I've heard that in about 25 years," Pelos said.
Credit union associations say their members are starting to pick up on business loan demand as well, with some bumping up against statutory limits on how many corporate loans they can make.
In Seattle, privately held Icicle Seafoods Inc, which had about $475 million of sales last year, has been using cash flow to buy fishing vessels and invest in a processing plant in Alaska.
But Chief Executive Dennis Guhlke said he expects next to use some bank money to continue expanding to meet international demand for Alaskan salmon and other products. In December, the company refinanced and increased its credit lines with US Bancorp and other lenders.
Guhlke wants to have the additional credit ready as he looks for new ways to grow.
"I expect to use this much more in the future than in the past," he said.