The last couple of years have been bumpy, to say the least. As strains of COVID and various government programs, most notable the Paycheck Protection Program (PPP), came and went in waves, the industry was on constant alert to react to the larger economic environment. But the end of 2021 has some promising indicators showing that the economy, and commercial lending, are on the rebound. Even with new COVID variants, there seems to be a general sense that the worst is behind us, and the market seems to be getting back to “business as usual.” Signs of a Strengthening Economy In general, the end of 2021 saw just about every major economic indicator – for both the economy at large and commercial lending, specifically – improve and/or outperform expectations. Below, we’ll take a closer look at these economic indicators, and see how 2022, for the most part, has followed the optimism. Economy Expands with Strongest GDP Growth in 4Q2021 Considered a macro economic indicator most highly correlated with commercial loan growth, GDP saw strong growth at the end of 2021. U.S. GDP expanded +6.9% (annualized) in the fourth quarter, the strongest reading in 2021, a figure that beat the initial forecast of somewhere in the 5% range. With U.S. economic growth much stronger than anticipated, it appears to have fueled a resurgence in loan growth. Inflation Runs Above Long-Term Average Higher inflation is generally seen as a positive for banks, raising net interest income and boosting profitability. At the end of 2021, inflation was running well above the long-term average. And while higher inflation is often seen coinciding with an uptick in commercial lending, these particular results are a bit of a mixed bag. High inflation could curtail consumer spending, which consequently hurts the sales numbers of businesses that borrow from banks. However, high inflation has, in years past, helps the increase in corporate borrowing by firms looking to lock in advantageous pricing. Business Confidence is High While the different emerging COVID variants did weaken business confidence relative to the levels reported at the start of 2021, when viewed over a longer horizon, business confidence towards the end of 2021 was at least on par with the pre-pandemic levels and well above the long-term average. Loan Growth is Back Data pulled from the AFS Pricing Service Database showed 4Q2021 results, fueled by higher line of credit utilization as well as an influx in new borrowing, boding well for the growth outlook at most banks. C&I loan balances surged with outstanding balances increasing 2.87% month over month in December, the strongest growth rate recorded for any month over the last 20 years. In the CRE arena, lending accelerated in December and we saw Construction & Land Development loan balances climbing steadily throughout the year. The better news is that the PPP, for some time the only meaningful source of loan growth for much of the industry, has run its course, and new bilateral loans are being created again. Total commercial loan balances, excluding PPP loans, finally returned to levels last seen before the pandemic in October 2021. At the end of 2021, total balances were 3.1% higher when compared to the December 2019 level. SOFR Adoption Continues SOFR adoption in the commercial loan space continues to expand, particularly in the bilateral market, with SOFR rates trending higher more than 20 bps. As of December, the volume mix by deal size and risk rating were comparable between LIBOR and SOFR loans. Fee penetration deteriorated in 2021, possibly a sign of intensifying competition. The Future Still Looks Bright All and all, the year ended with signs of an improving labor market and a strengthening economy, which are two factors that are often correlated with a rebound in commercial lending by supporting loan demand. High levels of business confidence and inflation should help support additional corporate borrowing ahead of the anticipated Fed interest rate hikes in 2022, which are expected to boost banks’ net interest margins. And we continue to see problem loans continue to fall, particularly in the energy and hospitality sectors. These all point to a resurgence in loan growth as we move deeper into 2022. We do, however, need to take into consideration other potential factors. High inflation (which in and of itself is usually an advantage for banks) and interest rate increases could strain debt service capacity of firms in vulnerable sectors (e.g., real estate). Because December was the last month banks were advised to make LIBOR loans, there may have been a rush to borrow under LIBOR pricing before it was no longer an option. Additionally, COVID-19 is still very much a presence, causing global supply chain disruption and shortages that, while improving, have not yet resolved and may impact business’ ability to borrow money. The final good news, at the moment, is that with full January data now in, the view is still optimistic, despite a decline in C&I bilateral loan in January, which was much less pronounced than reported in January 2020. Participated and syndicated balances continued to grow and a strong labor market and falling COVID-19 infection rates should continue to help support commercial loan growth in the months that follow. About the Data All information is pulled from the AFS Pricing Service database, considered the industry source for commercial lending trends. The database totals more than $1.2 trillion in committed exposure, with broad coverage and depth across C&I and Commercial Real Estate product categories. The database is seeded with over 80,000 new or renewed loans per quarter, creating a robust set of historical performance metrics to model and analyze. The information shared here was also discussed in the recent complimentary AFS webinar, “2021 Year in Review: Commercial Loan Growth, Pricing, and Credit Trends.” Stay on top of important commercial lending pricing trends with the industry renowned Commercial Loan Pricing Trends Newsletter. Sign up to receive the newsletter, information on webinars, and more insights from AFS!