Why Now is a Perfect Time for a Credit Department Tune-Up

As bankers are keeping an eye on CRE lending challenges affecting both supply and demand for capital, demand from borrowers is well off the robust pace of lending that many banks saw in 2022.

The good news is that lenders are optimistic that CRE transaction activity will pick up later this year or early in 2025. However, more Fed rate hikes are unlikely. Even though the optimistic outlook for rate cuts has waned some, some forecasters still expect at least one, and perhaps two rate cuts of 25 basis points by the end of the year.

“Although lenders are looking to make good, profitable loans, they also are well aware of the lingering challenges and risks that remain in the real estate market, including slowing rent growth, spikes in insurance costs that are putting pressure on operating expenses and pockets of oversupply in some areas. To help offset those risks, banks are aligning with quality sponsors and paying careful attention to the financial assumptions going into a deal related to income, expenses and market conditions,” notes a recent Independent Banker article.

The CRE landscape is an area bankers will continue to watch closely in the months ahead and the financial institutions that take time to fine-tune their credit administration processes will be set up for success, no matter how the market shakes out.

Ramp Up Credit Capacity, Not Risk

Though no one knows for sure when, rate declines will eventually come. When they do, loan demand will inevitably follow. Strong credit administration is the foundation for more efficient lending operations throughout the life of a credit – from originating and underwriting a new loan to annual reviews of existing credits.

Reviews of existing borrowers is a key area of focus for credit administration and it’s top-of-mind for bank leaders. Ensuring team members are equipped with the tools and policies they need to pursue loan accommodations or workout scenarios as appropriate is more important than ever, given the ongoing stress in the CRE space and the wave of property debt set to mature over the next three years.

Financial institutions should consider conducting an audit of their credit administration functions. Pinpointing areas and processes that could be optimized will empower analysts to uncover both hidden opportunities and risks within the portfolio, regardless of interest rate and other economic volatilities.

3 Ways to Empower Your Credit Department

1. Establish Clear Expectations & Policies: Everyone on the credit administration team needs to understand their roles and responsibilities as it relates to managing risk and growing the portfolio. Starting at the top, clearly define the levels and types of risk your bank is willing to take on to achieve its goals. When team members are cognizant of the bank’s goals and risk capacity, they are more equipped to make informed, strategic decisions that align with the bank’s policies – whether pushing a new credit request through underwriting or dealing with a distressed account that’s up for review. This is the first step toward creating a strong credit culture. 

2. Eliminate Friction: There are countless tasks and touchpoints associated with any given loan request, often involving input and collaboration from multiple team members. Identify where there are pain points or cracks in key business processes. For example, are credit exceptions or loan documents challenging to manage? If so, it may be worth investing in tools that help track and manage those to ensure nothing falls through the cracks. 

3. Invest in Professional Development: It’s not enough to rely on general market trends and reports without digging deeper into other underlying factors that may impact a borrower and ultimately, the financial institution. Each borrower faces unique challenges and opportunities, many of which may not be initially apparent. Make sure credit administration staff understand how to assess relevant external factors, such as labor shortages or supply chain issues, and how they could impact a borrower’s cash flow. Train team members on ways to identify less obvious risks. For heavy portfolio concentrations, banks may opt to delegate analysts who have a specialty in those concentrations or deal types. These experienced, specialized analysts can share their knowledge or even serve as mentors, spreading their expertise to more junior team members.

While loan demand remains sluggish and headwinds persist for certain sectors of the CRE space, now is the time for financial institutions to evaluate their credit operations. Identifying and addressing pain points or gaps in your business processes now will pave the way for more stable and profitable portfolio growth in the future.

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