Growth in Commercial Lending Provides Opportunity in Commercial Loan Origination Technology

After several years of stagnation, the US commercial lending market is showing double-digit increases.

New research from TowerGroup finds that growth in the US commercial lending business will increase by 11.3% in 2006, a significant shift from the flat period of the early 2000s which was characterized by declining corporate profits and tightening credit standards.

The author of the research, senior analyst Patricia Hines — the newest member of TowerGroup's Wholesale Banking research practice — expects this growth trend to continue strong into 2007.

Hines notes that while commercial lending outstandings are on the rise, net interest margins hit a 20-year low in 2006 — forcing banks to look at more efficient ways to originate commercial loans and preserve profitability of the product line.

"Net interest margins for banks in the commercial lending business continue to be squeezed by upward pressure on deposit rates and downward pressure on loan rates driven by competition from banks and nonbanks alike," said Hines. "These forces are driving financial institutions to increase efficiencies to help protect profitability. Commercial lending executives should take advantage of the window of opportunity opened by these market drivers to invest in front-end loan systems that can dramatically improve business processes."

Highlights of the research include:

• A combination of factors currently impacting the commercial lending industry is creating an environment for dramatic improvement in the way banks originate commercial loans. These factors include: the current economic environment; net interest margins; credit quality; commercial lending silos; risk management and reporting requirements; and operational efficiencies.
• TowerGroup believes that workflow-based commercial loan origination systems can increase bank productivity and reduce underwriting expenses, while enforcing consistent credit policy and supporting regulatory reporting imperatives.
• Recent technology trends such as business process management (BPM), workflow platforms, rules engines, enterprise content management (ECM), and service-oriented architecture (SOA) are all contributing to the current evolution in commercial loan origination systems.

Hines continued, "For most banks, commercial lending is a strong contributor to robust earnings. However, to offset shrinking margins and ensure credit quality, banks need to rethink their underwriting processes and implement improvements to their loan origination technology. Investment in technology and associated process redesign can lead to benefits across several areas of the bank."

Prior to joining TowerGroup, Hines served as director of self-service banking product management for S1 Corporation. Before that, she spent 15 years at FleetBoston Financial in a variety of business, technology, and operations positions supporting wholesale and small business banking. Her last assignment at the bank was as senior vice president in Fleet's Business Development & Strategy eBusiness group, where she was responsible for small business online banking. At TowerGroup, Hines covers small business banking and commercial lending.

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