Many community banks and credit unions are turning to C&I to solve a core strategic problem: loan books with too much concentration in commercial real estate for regulators’ tastes. iStock illustration

The commercial and industrial market has seen a relative lack of demand but with interest rate cuts, CT bankers say more activity could be on the horizon. 

According to data from the Federal Reserve Bank of St. Louis, the net percentage of banks reporting stronger demand for commercial and industrial loans from large and middle-market firms has been at or below zero percent since the fourth quarter of 2022.  

Jim Hickson, senior managing director for middle market lending at Berkshire Bank believes that competition helped play a part in the slowdown in the C&I market. 

“Although every region is different in Massachusetts, the commercial and industrial lending market is very competitive right now,” he said. “There has been a wave of consolidations, as well as merger and acquisition activity, that has resulted in fewer C&I lending opportunities for banks in general. Consolidations in all traditional C&I sectors combined with a rise in service-related industries are driving these changes in the market.” 

This extends out to Connecticut where Andreas Kapetanopoulos, NBT Bank’s regional president for the state, believes that the nature of C&I relationships can make it hard to find new opportunities. It usually takes dissatisfaction with a particular institution to see a C&I customer switch to a new lender which leaves little opportunity for new origination. 

“I think the C&I market is always the tougher market to penetrate,” he said. “I think there’s a much longer selling cycle. When it comes to commercial real estate, there is the need for the project to get financed so the banks and the sponsors get together to see what we can put together. With C&I you have long term relationships whether it’s manufacturers, contractors, other industries and then the commercial side, but there’s long relationships with banks. So typically, maybe there’s a dissatisfaction between the borrower and their current lender. There may be a specific need, they may have out grown the lender’s capacity. So typically, there’s a specific event that needs to come up to have movement on that side.” 

Matthew Hummel, KeyBank’s market president for Connecticut and Massachusetts added that the wake of Silicon Valley Bank’s collapse caused regional banks to pull back and curtail lending.

“So the banking community, in general, became much more cautious and kind of pulled back some of the chips off the table. I think I would say consistently that all the banks are taking care of their existing clients, but growing the business and new relationships, making a $50 million loan that activity to new clients really slowed or became more expensive,” he said.

Interest Rate Impact 

But with the Federal Reserve’s recent cut to its benchmark short-term interest rate, demand could begin to pick up. The 50-basis-point cut made last month could serve as a sign to investors that more cuts are on the way and signal to businesses that now is the time to look at growth. 

Hummel believes that rates will continue to come down but Hummel also believes that the interest rate cuts have had a tangible effect on the outlook of the C&I market.  

“Fifty basis points of interest rate cuts, I think has created a fair amount of optimism among the leadership that the rates aren’t going any higher,” he said. “They’ve peaked, and they’re either gonna stay flat or they’re gonna kind of start to continue to come down.”

KeyBank performs a middle-market sentiment survey once a year with 700 respondents who are chief executive officers or chief financial officers. Seventy-eight percent of respondents said that their outlook on the economy was very good to excellent which is the highest total in years. In addition 52 percent said they are looking at merger and acquisition opportunities in the next 12 to 18 months. 

While interest rates play a role in the positive sentiment, Hummel also believes that companies that have deferred investment will be looking to return to investing. 

“I mean, private equity firms can proceed with capital,” he said. “They want to put that money to work. So I just think equipment wears out, trucks need to be replaced. I think what’s bringing the demand is it’s just people have to defer an investment, they can’t wait any longer. So if you’re a private equity firm, you can’t go two years without doing a deal.”