Special feature: The rise of commercial lending

Sam Cordon

June 19, 2013

This summer could mark a turning point in the UK economy. Optimism is growing as huge monetary activism and a long struggle with austerity may be starting to pay off. It looks like more than a hollow FTSE bubble too. There’s reason to believe that cash is starting to leak out of the financial system into real activity.

The Confederation of British Industry has predicted 1% economic growth by December and 2% growth next year. Even Mervyn King has been persuaded by the seductive summer of 2013.

The Bank of England revised its growth prediction upwards only last week concurring with the CBI’s 1% forecast.

Business lending is the grease in the economic machine translating better financial health into a real-world capacity for higher GDP.

Commercial mortgages are no exception. In fact this type of business finance has a host of advantages that suit today’s environment.

Commercial mortgages are secured. On balance sheets that security makes it easier for lenders to lend.

Additionally the greater reliability of many businesses compared to individuals makes commercial loans a prime opportunity for lenders to boost their stock of quality loans.

Second, commercial lending is getting cheaper because of competition. Interest rates on commercial mortgages now start at 0.50%. This represents a huge improvement on previous years and comes as the closely associated LIBOR rate has attuned itself ever closer to the record-low official base rate.

Lenders are expanding their commercial loan book by 100%. That growth puts the 1% or 2% growth in the wider economy in the shade. But as things begin to heat up, the world of commercial lending needs to adapt in order to thrive. Technology will be more vital than ever.

Santander is one of the most ambitious commercial lenders. The bank is planning to refocus £2bn, originally earmarked to buy branches of Lloyds, to double their market share of SME lending in the UK.

Already that’s twice the size of the government’s business bank and overshadows Vince Cable’s initial £300m offering almost seven times over.

However, while commercial lenders are riding a powerful wave they will need a superhuman sense of balance to out-ride their competitors. Lenders need to make conscious decisions which will determine their share of the commercial market in the future.

The next generation of risk control technology is being developed now. Lenders and their partners are making great strides in property risk and third party controls. A smooth functioning valuation machine is critical too.

The best packaged deals are supported with valuations completed by diligently selected, well managed valuers who will conform to tight service and quality standards.

But technical restrictions are still holding up other lenders. Santander can afford to be ambitious partly because of its approach to new technology. Allocating a large sum of capital has removed one hurdle but making use of more flexible ICT will allow firms like Santander to take this decisive step more rapidly and more confidently.

The chairman of Metro Bank might have gone a little over the top in describing the IT in British banks as “one step up from a quill”, but he certainly gets an important point across. Lenders’ current technology is often a patchwork quilt of outdated systems.

Fast-growth, like at Metro Bank or Santander, demonstrate a new wave of competition in the industry. By contrast poor understanding of customers can have a tangible effect on market share.

Managing valuations online is also the only way to understand past decisions and to maintain rigorous quality control across an entire network.

Furthermore, out-of-date IT or inaccurate valuations can actually restrict the supply of lending not just demand.

By understanding every aspect of their customers commercial lenders can maximise their overall lending, safe in the knowledge they aren’t taking unnecessary risks.

In the past, and all too often in present systems, silos of data can contain unknown quantities with potential risks lurking for a long time before being discovered and minimised.

A climate of optimism will only present more tangible opportunities for those lenders with the capacity to act decisively.

With technology informing strategy at the highest level of management rather than providing mere administration commercial lenders can throw away their quills and get lending.

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