Bankruptcy may result in business for banks


    While retailers may have a tougher time finding credit if CIT Group Inc. files for bankruptcy protection, such an action could create commercial lending opportunities for some community banks in the metro area.

    CIT Bank is a division of the $67 billion bank-holding company that specializes in making loans to small and medium-sized businesses. With the tanking of the firm’s stock price at the end of last year and with CIT Group posting losses of roughly $600 million for the year, an array of Wall Street analysts have indicated that bankruptcy is in the company’s future due to liquidity issues — even with the $3 billion private loan from bondholders last month and a $2.3 billion loan from the government’s Troubled Assets Relief Program in December.

    “I don’t think it will have a tremendous impact for the banks around the Grand Rapids area,” said Matthew Magee, vice president of equity sales for FIG Partners LLC, a broker and dealer that specializes in bank and thrift stocks based in Atlanta.

    Magee, who was born in Ludington and raised in Ionia, works out of the Chicago office of FIG Partners. He tracks community banks and commercial lending in the metro market.

    “I don’t think there are many bankers here who are really concerned about what might happen there. They’re kind of dealing with a lot of their own issues now, and I don’t think (a bankruptcy) is going to have a huge impact,” he said of the local commercial market.

    But Magee did say if CIT Group files, there will be a domino effect because there always is one when a big bank has to reorganize. The real question is, he said, to what degree will a filing have on the area’s lending market? His answer might make some community bankers smile.

    “When I look at that, there will be some commercial customers of theirs that will have to find financing somewhere else, and they might have to go down to the community-banking side of things. There are some community banks looking for good credits right now,” he said.

    “Not all of them are because there are some banks that have said they’re trying to shrink their balance sheets and conserve capital because they’re dealing with their own internal credit concerns,” he added. “But there are a handful of community banks in and around the Grand Rapids marketplace that are ready, willing and able to lend to creditworthy customers.”

    So a real business opportunity could emerge for those banks if CIT Group declares bankruptcy.

    “It definitely could. If they file bankruptcy and you have commercial customers in the Grand Rapids market who are no longer able to get their financing there, and they’re good credits, they’re going to have to find somewhere else. I think the local community banks could be a place for them to go,” said Magee.

    While commercial customers may find a willing lender after a filing, retailers may not. CIT Bank has lent a lot to vendors through factoring, a model that has the lender acting as sort of a short-term middleman. This type of lending is done in seasonal cycles that are in sync with the stronger selling seasons such as the holiday shopping period and the current back-to-school sale — times when vendors need to purchase new inventory or extra merchandise.

    CIT Bank happens to have one of the largest factoring businesses in the country — if not the largest — and has become a vital financing source for smaller sellers. Other big banks only dabble in that market and aren’t likely to fill the void that would be created if CIT Bank stopped lending.

    “That business is a little bit riskier. So there is going to be a fallout if they file for bankruptcy in that market,” said Magee.

    It’s riskier because the retail goods serve as collateral for the short-term loans and a bank has to have a high volume of business to turn a profit. Community banks are unlikely to be a lending source for vendors unless one has an impeccable credit history.

    “Banks normally don’t get involved in factoring. It’s a little too risky right now, and it’s just never been a part of the community-banking model. So if there are retailers there getting loans through factoring, they’re going to have to find different avenues, which there aren’t a lot of right now,” said Magee.

    “Wells Fargo does some; GE Capital Corp. does some. But to what degree they’re going to step up on riskier loans right now is really questionable.”

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