How to defend the bank-based equipment finance business line

The ripple effects of the 2023 bank failures continue, with a tight lending market that prompted many banks to focus on preserving capital and pull back from equipment finance, according to Rick Remiker, a vice chairman with The Alta Group.

Evidence of this pullback is seen in the 2024 Monitor 100 rankings, which show that nearly 60% of U.S. bank affiliates reduced their new business volume in 2023. The annual Monitor 100 rankings feature the equipment finance industry’s top performers, ranked by total new assets and new business volume. The last time the magazine saw a retreat from banks this large was during the Great Recession, when 72% of banks reduced their new business volume in 2009.

“While the Monitor 100 rankings show us that the bank retreat from equipment finance is real, it’s important to keep a long-term view. This environment will not last forever, and there are many reasons banks should keep a foothold in equipment finance so that they are ready to serve these customers once conditions improve,” Remiker said.

In an article appearing in the 2024 Monitor 100 magazine issue, Remiker makes the case for defending the bank-based equipment finance business, highlighting the long-term value of this business line and its resiliency through various economic cycles.

A stark transition point in the industry came in early March 2023 when the FDIC seized the failed Silicon Valley Bank, Remiker writes.

“Our industry shifted immediately from an environment of optimism and projected growth, coming off strong new business volume growth in 2022 and early 2023, into a dramatically different mode,” he says.

The subsequent collapse of Signature Bank and First Republic Bank added to the mood of caution within much of the American banking sector.

“Almost overnight, (many) banks became hyper-focused on preserving capital,” Remiker writes. “Lending efforts focused only on existing bank customers, and only at a very profitable level. There was a complete focus on gathering and retaining deposits and reassuring existing customers—activity that takes place on the opposite end of the balance sheet from where equipment finance operates.”

‘Shrink to survive’ mentality hurts equipment finance

The swift shift from growing new business volume to focusing on higher-profit, risk-adjusted returns predominantly for bank customers created a major hurdle to many bank-based equipment finance operations, Remiker says. This line of business serves customers who may do no other business with the bank, but could later grow the relationship. When the focus shifted from growing new business volume to scrutinizing profits, the willingness to serve these non-bank customers dried up.

“As the year wore on, we saw a number of bank parents analyze exiting or selling their equipment finance businesses,” Remiker notes. “In many cases, this was not feasible, as many of these loans/leases were put on in a wildly different interest-rate environment, and today’s higher-rate environment made those assets unattractive or uneconomic for a sale.”

The need for capital to finance equipment purchases has not slowed down, however. Indeed, he says the bank retrenchment brought opportunity for independents, captives and non-depository funded competitors.

As this year’s Monitor 100 rankings show, the 2023 bank failures and ensuing lending pullback have shifted the top players in equipment finance. But that won’t last forever, according to Remiker.

“As conditions improve, equipment finance will continue to be a strong line of business in which banks can grow their assets,” he writes. “While we have unfortunately seen a few banks exit the business in recent months, the reality is that scrapping the equipment finance line of business is not a sound long-term move for most banks. When asset growth becomes a priority again, those banks that have cut their equipment finance businesses will have a hard time ramping back up.”

He suggests the following strategies to defend a bank-based equipment finance division in a difficult economy:

Focus on alignment

Stay aligned with your treasurer, CFO and the asset-liability committee (ALCO). Can you find an opportunity to present an overview of your business to the bank’s board of directors or executive leadership?

“It’s important to defend your business, and to highlight to leadership the overall strength of the equipment finance industry through the various economic cycle,” Remiker writes. “Remember, the need to grow assets will return. Equipment finance is an area banks will want to be able to tap once the mood shifts.

Play the company role

While deposit growth and retention aren’t traditionally the focus of equipment finance organizations, efforts to show you can contribute to this goal will help the business line be seen as a contributing part of the business.

“Run a deposit-gathering campaign,” he says. “Even if you aren’t tremendously successful, it’s likely you could gather some deposits from a customer, vendor partner or supplier you are working with.”

Focus on bottom line

Don’t be hyper-focused on growing new business volume or year-over-year asset growth. Doing less business, but doing it more profitably, will be looked on more favorably by bank parents.

“It’s important to focus on profitability and return,” Remiker notes. “A smaller, more profitable EF business line may stand a better chance of surviving than a higher-volume, less profitable enterprise.”

Slim down strategically

Equipment finance leaders must scrutinize markets that lie outside the bank’s footprint, such as vendor finance. Analyze whether you have critical scale, or what your market positioning is versus the competition in lines of business that are not typically aligned with bank customers.

Same with the buy desk, he writes. While minimizing this activity still makes sense, it’s probably smart not to exit this area altogether, as buying equipment finance loans originated elsewhere can be a quick path to asset growth once market conditions improve.

Don’t be a problem

Take steps to gain a clear understanding of portfolios. If there are credit issues or residual loss issues, identify them early and give leadership advance notice so that they can take appropriate actions to work through them.

Originate to syndicate

Liquidity issues primarily impact community, regional and super-regional banks. Larger financial institutions do not share these liquidity concerns, and are in asset-growth mode.

Remiker suggests originating equipment finance loans and leases specifically to sell to some of the larger bank-based operators.

“This could be challenging to do, but it keeps you in business and provides some fee income without using balance-sheet capacity,” he says.

Know when it’s go-time

With smaller banks pulling back on equipment finance activity, think about when it’s time to bet on the future. That could be later this year, or early next year. Can you get there before others do?

Remember this, Remiker says: Equipment finance is a solid business that has performed well for banks through numerous economic cycles. Banks may want to alter the shape of their equipment finance businesses in the current environment, but industry leaders who can help bank parents to see the long-term value in preserving a footprint in this industry are helping them to preserve an important source of asset growth that will be helpful once things turn around.

Read the full article here.

Rick Remiker is a vice chairman with The Alta Group. He has extensive leadership experience at the bank parent level and has shepherded organizations through challenging economic cycles as a C-suite company executive and industry leader. Rick has considerable experience in the middle- to large-ticket sectors of the equipment leasing and finance industry, as well as extensive accomplishments in corporate banking, commercial finance and specialty lending. He served as chairman of the Equipment Leasing and Finance Association in 2013.