COVID-19 hits hard, but commercial lender portfolios bounce back

Like a swift moving thunderstorm, the COVID-19 pandemic rolled in and hit financial institutions and the businesses they serve with an unexpected punch. As the clouds cleared and stay-at-home orders began to lift, the emerging aftermath revealed a number of surprises.

First and foremost, was the state of commercial lending portfolios at financial institutions. Finastra’s recent webinar featuring survey data from business lending banks and credit unions conducted in the third quarter of 2020 by Aite Group, revealed that only 15% of respondents were extremely concerned about the quality of their commercial lending portfolios. An astonishing 30% were only a little concerned, and the majority (40%) were moderately concerned.

Digging deeper into survey findings, several factors emerged to explain lender optimism. The first was the impact of the Payment Protection Program (PPP). As of the end of June, the SBA had reported that over $4 million in loans had been given to American small businesses.ⁱ 

The second factor that helped to shore up the quality of lending portfolios at banks and credit unions was loan forbearance. Under the CARES Act, lenders were able to offer two rounds of principle forbearance to borrowers for double three-month terms, without the need to perform a troubled debt restructure on the loan. As such, financial institutions were able to avoid any adverse impacts on their risk ratings.

Both the rapid access to critical funding and loan forbearance gave U.S. small business owners breathing room to address the challenges associated with remote work environments, falling demand, and in many cases, temporary closures. But these two factors alone were only part of the story.

Across the survey, lender after lender issued a similar refrain. They had underestimated the human capacity for innovation and how resilient their borrowers were. As it turns out, they had also underestimated how innovative the financial institution could be.

As the initial wave of PPP loans became available, lenders turned over an incredible volume of loan applications. As financing was approved, lenders found that they were building loyalty with business entities, and that the financial institution was picking up wallet share from businesses as they opened new accounts and adopted additional banking services.

Expanding relationships, combined with stable loan portfolios, made it possible for financial institutions to turn their attention to growth strategies. According to the Aite Group survey, 60% of survey participants were seeking new lending opportunities.

Supporting growth in the year ahead

As the clouds cleared on the initial wave of the COVID-19 crisis, it became rapidly evident that not all businesses had been hit equally hard by stay-at-home orders and business closures. In fact, some were flourishing.

Likewise, as a vaccine is revealed and life begins to return to normal, some businesses will struggle for a foothold in the new economy while others will burst onto the scene with a flurry of growth initiatives.
Lenders understand this and that volumes could rise rapidly. To support current and future growth, banks and credit unions are increasing their focus on digital technology.

For many, digital technologies established before the pandemic were put to the test as lenders responded to the incredible demand for PPP loans. Financial institutions that had automated standard workflows were able to realize the full benefit of their investments through streamlined processing and faster time to decision and funding.

Other lenders were troubled by gaps in their digital capabilities. Instead of automating critical workflows across the entire loan lifecycle, they had embraced a strategy of piecemeal digital adoption. The result was a bevy of efficiency that then slammed downstream manual processes, wiping out any speed gains that had been realized.
As we move into a new year, lenders will need to work out gaps and automate final workflows for consistent efficiency across the end-to-end lending process. One way that financial institutions can digitize end-to-end workflows is through cloud-based platforms and APIs.

The provided plug-and-play functionality associated with cloud-based platforms makes it possible for financial institutions to adopt an integrated environment of applications, all designed to automate critical workflows to return faster credit decisions. Rapid time to funding will be critical to businesses as they adapt to the post COVID-19 world and will allow lenders to grow faster with less risk.

Analytics will also play a prime role in customer acquisition by empowering lenders with data insights that directly predict buying behaviors across customer segments. Lenders can then directly target marketing endeavors to those who are most likely to need funding, opening doors to opportunities. This type of outreach is particularly important in the post-COVID world as more potential borrowers eschew branches in favor of digital interactions.

U.S. businesses and the financial institutions that serve them have shown remarkable resilience during the COVID-19 crisis, but it is not a time to rest on laurels. Instead, financial institutions should be weeding out remaining inefficiencies and adopting the digital tools and capabilities to support emerging opportunities in the year ahead.

_{ⁱ  “Paycheck Protection Program (PPP) Report.” U.S. Small Business Administration, Jun. 30, 2020. Web.}