2015 q3 small business credit outlook - bank assetpoint · the thomson reuters/paynet small...
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“All’s Well that Ends Well” – Shakespeare“All’s Not Well” - Hamlet
Small Business Credit Outlook
2015 Q3
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SBDI 91-180 Day Delinquency Index
PayNet Small Business Cycle
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1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2%
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1Q11
1Q08
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1Q071Q06 1Q15
3Q15
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RECES
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N EXPANSION
CONTRACTION
RECOVERY1Q09
0%
Business CycleAs 2015 ends, it is easy to say all is
well going into 2016. 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 Q1
2016. 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 above-
average credit quality.
2016 will look more like 2012–2013
which provided lower investment,
borrowings, and below average
defaults for small business credit. Post-
presidential election policies should
provide more clarity and direction
around which small businesses can
plan and adjust their business models.
Recent Investment ActivitySmall 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 de-
risking 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 137.9
in September 2015 to 131.7 in October
2015. 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 2010.
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 year-
over-year change slowed from 10% to
7% as compared to the same period
one year ago.
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30%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
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2006 2007 2008 2009 2010 2011 2012 2013 2014 20152005
Inde
x Va
lue
Thomson Reuters/PayNet SBLI Year-Over-Year Change(January 2006 - October 2015)
Thomson Reuters/PayNet Small Business Lending Index (SBLI)(January 2005 - October 2015)
Credit RiskSmall business financial health
remained strong with the Thomson
Reuters/PayNet SBDI 31-90 days past
due constant at 1.19% in October 2015.
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-over-
year 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
2014. 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 91-180 days past
due remained unchanged at 0.25% in
October 2015 from September 2015
which is at the level of last month’s all-
time low for the time series.
As compared to one year ago,
delinquency is down 17% (5 bps), the
sixth consecutive month of year-over-
year 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 2015.
2006 2007 2008 2009 2010 2011 2012 2013 2014 20152005
1%
0.5%
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2%
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3%
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4%
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x Va
lue
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30%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Thomson Reuters/PayNet Small Business Delinquency Index (SBDI)(31 - 90 Days Past Due)
(January 2005 - October 2015)
Thomson Reuters/PayNet SBDI Change vs. Year Prior (31 - 90 Days Past Due)
(January 2006 - October 2015)
1.50%1.00-1.50%0.50-0.99%< 0.50% >
PayNet Small Business Delinquency Index by State (31-90 Day)
HI
WA
OR
CA
NV
ID
MT
WY
UT
AZNM
CO
ND
SD
NE
KS
OK
TX
MN
IA
MO
AR
LA
WI
IL
KY
IN
MI
TN
MSAL
OH
PA
WVVA
NC
SC
GA
FL
ME
NY
VTNH MA
RICTNJDE
MDDC
AK
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 30 – 90
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.
Credit Risk ForecastCredit 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 2014. AbsolutePD
forecasts a slight increase to 1.6% by
year-end 2015 then through 2016.
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 2016.
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
IndustrySegment
Actual Historical Default Rates (1) Forecast Default Rates (2)
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015* 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%
$1.0mm or Less in Total Lease/Loan Exposure *2015 Forecasts Include 3 Quarters of Actual Defaults
Source: (1) PayNet Small Business Default Index
(2) PayNet AbsolutePD®
SummaryAll’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.
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.
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