The resilience of the asset-based lending market continued in Q4/23, with lenders holding on to positive sentiment against the backdrop of an uneven economy while closely watching portfolios in 2024, according to data released by the Secured Finance Network from its quarterly Asset-Based Lending Index and SFNet Confidence Index.

“The asset-based lending industry performed well in the fourth quarter of 2023, as the economy finished the year strongly, albeit a bit unevenly,” Richard D. Gumbrecht, CEO of SFNet, said. “Overall, lender confidence rose, reflecting a moderately positive view of the industry going forward and a sense that any portfolio softening will be mitigated. ABL has always been an all-weather industry that will continue to perform well even in a bumpy economy.”

In the most recent Confidence Index, lenders acknowledged challenges, but they had improved expectations for portfolio performance, demand for new business and hiring. The outlook for business conditions also improved among both lender groups, but while bank expectations rose for client utilization, there was a slight decline among non-banks.

Survey Highlights

For banks, asset-based loan commitments (total committed credit lines) were down slightly (0.7%) in Q4/23 compared to the previous quarter. Outstandings (total asset-based loans outstanding) fell 5.4%. Commitment runoff fell by 2.3% quarter over quarter.

“Weaker new originations largely caused the muted Q/Q commitment growth, with the fall in new commitments with new clients outpacing a slight decline in runoff to turn net commitments negative,” the report said.

Non-bank lenders, however, experienced a 4.5% increase in total commitments in Q4/23. Total outstandings were up as well, rising by 1.5%. The growth in total commitments stemmed from a double-digit increase in new commitments with new clients and a significant decline in commitment runoff, the report said.

“With increased new commitments and decreased runoff, net commitments increased for the non-bank segment,” the report said. “Similarly, new outstandings rose significantly (+63.2%) and outstandings runoff plummeted (-41.3%), leading to an increase in net outstandings.”

In terms of credit-line utilization for bank lenders, the rate fell to 36% in Q4/23, which was below the five-year historical average of 39.4%, the report said. For non-banks, commitments growth exceeded outstandings growth at year-end, leading to a drop in the utilization rate to 48%.

“As in prior quarters, the vast majority, 85.3%, of the non-bank borrowing base in Q4 2023 was composed of advances against receivables and inventory,” the report said. “The remaining categories compose only 14.7% of the overall borrowing base.”

Portfolio performance at the end of 2023 deteriorated for banks and non-banks alike but was within the historical range. Criticized and classified loans, non-accruals and gross write-offs rose for banks quarter over quarter. Non-banks, meanwhile, reported increases in non-accruals and write-offs.

“Portfolios are generally stable despite the increase in criticized/classified loans and non-accruals, and write-offs remain low by historical standards,” the report said. “That said, performance is toward the weaker end of the normal historical range and lenders are keeping an eye on portfolios for signs of stress.”