Fear and uncertainty triggered by the recent news of major bank failures have resulted in a decline of overall lending by lending institutions, which have become much more risk-averse, says Ann Brodette, senior vice president of sales at Mitsubishi HC Capital America.
“If you have credit lines with banks, you normally go to your regular bank to get loans or leases, but it might be a little bit less. They might not be willing to take as much exposure in your company, as they have previously,” says Brodette in a recent video episode of Fast Forward.
She cites the recent Bloomberg report, which showed a $105 billion decline in commercial bank lending over a two-week period in late March, “the most in Fed data going back to 1973.”
Brodette shared her thoughts on the current volatility in the financial sector, particularly how interrelated factors such as bank failures, high interest rates, and inflation could affect fleets, and how fleets could lessen the impact of the decline in overall lending.
Fewer Lenders, Less Money
With high interest rates continuing “to be around for awhile,” Brodette says that the decline in lending by banks will limit the money being loaned to fleets.
Contracting banks will try to preserve their capital, but it depends on the type of lending institution, Brodette says. “Some of the banks are going to try and keep some more capital on hand, which was one of the reasons why other banks got into some trouble.”
Some banks may eliminate their transportation portfolio if they deem it as a risky investment, she says. “It’s not that it’s happening to every bank, but more likely than not, they’re going to start looking at their riskier business that they have on their books. And if it happens to be transportation, they may be backing off that a little bit or getting out of it entirely.”
Brodette sees some hesitancy on the part of the regional banks when it comes to lending to the transportation industry. “Potentially they’re stepping out of the market, at least temporarily. We’ll see some of them go by the wayside, that they’re just not going to want to invest in transportation at the moment.”
She adds that some independent lenders may be dropping out as well. “Some came in the market when it was really great a couple years ago, and they gave out all kinds of loans, good interest rates. But their credit standards weren’t that great.”
Since some banks may allocate only a certain amount of money in the transportation industry, even fleets with great credit are affected by the decline in overall lending, Brodette says. “If you have to take out $2 million to replace some of your trucks normally, they might come back to you and say, ‘You paid great, but unfortunately, we’re restricted a little bit. So we feel comfortable with $1 million or $1.2 million.’ Some might be lower, but the interest rates might also be higher.”
Brodette says some fleets may be required to procure a larger number of vehicles to qualify for a good credit rate from a lending institution, whereas previously, a smaller number of vehicles may have sufficed.
During a lot of uncertainty and volatility in the financial sector, she emphasizes the importance of “trying to diversify your lenders a little bit and not putting all your eggs in one basket.”
Confluence of Factors Fueling Economic Instability
Brodette sees one more hike in the interest rate of approximately a quarter of a point beginning in May. She adds that, subsequently, “the Fed is going to put a pause on any more interest rate hikes, at least for a while. We feel pretty confident it’s going to cool off for a little bit.”
Because of the instability due to the Silicon Valley Bank and Signature Bank failures, she says it is important to restore confidence in the banking market, but loss of confidence could ensue if the interest rates keep rising.
However, there are a few wild cards, such as the debt ceiling, which is one of the factors that may affect interest rates and the amount that lending institutions are willing to loan to the transportation industry, Brodette says. She adds there is a lot of uncertainty on how Congress would deal with the debt ceiling. “Until that stabilizes, and there’s a resolution for that, you’re still going to see some instability. You’re going to see maybe a pause on business growth a little bit, and investment, while people are waiting to see what’s going to happen.”
Brodette says the rate of inflation is “just not rising as much as it was,” and the federal government is also trying to avoid the recession that may be coming as well. “So crystal ball, who knows, but we’re definitely in just crazy economic conditions right now.”
Creating Cash Reserves
With decreased lending from banks, Brodette advises fleets to have cash reserves in weathering headwinds such as higher gas prices, higher equipment costs, and lower spot rates. “If something were to happen to your bank, could you pay your payroll? You just want to make sure that you have a little bit more cash.”
One way to reserve more cash for emergency purposes is by extending the length of term loans, she says. “If you’re getting some new loans or leases, and if you normally get a 36-month or 48-month term loan, you might want to extend to 60 or 72 months. So your payments are lower each month. You have a little bit more cash on hand, maybe for some of those extra expenses.”
Many loans are currently defaulting, and even some big fleets have defaulted on some trucks, which have only been used a few months, Brodette says. “With some cash on hand, could I go in and scoop up some of those repos, and how can I capitalize on somebody else’s loss?”
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