Small Business Credit Outlook: Loan Strength Fuels Russell Rally

Since the beginning of the year, the Russell 2000 small-cap index has been one of the bright performers out of the indices. With YTD returns of 10.13 percent on June 20th, only the NASDAQ, at 11.06 percent, has outpaced it since January 2nd. In comparison, the S&P 500 large-cap index and S&P 400 mid-cap index have returned 2.65 percent and 4.4 percent so far this year. Investors have made it clear they have preferred shares of smaller companies so far in 2018.

Data from the Thomson Reuters/PayNet small business reports present data that suggests stronger credit trends in the small business sector could explain some of the bullishness. The pair of data analytics companies aggregates lending data from firms that represent “Main Street” and presents its findings in their “Small Business Credit Outlook” and “Small Business Credit Monthly Report.” The PayNet website also includes historical data sets for the Small Business Lending Index (SBLI) and Small Business Delinquency Index (SBDI).

Small businesses have been one of the main group of market participants to enjoy the benefits of low-interest rates. As the chart above shows, the deep dive into low originations and high delinquency was quickly reverted starting in 1Q 2010. By 1Q 2012, conditions had recovered and gradually expanded to improve beyond pre-crisis levels. Thomson Reuters and PayNet have new determined that the latest quarter’s origination level, 1Q 2018, is the best it’s ever been.

While originations continue to grow steadily, “loans severely past due” have ticked up since 2016. Not surprisingly, this coincides with the beginning of the tightening process initiated by the Federal Reserve. According to Thomson Reuters/PayNey, delinquency rates are 12 basis points off of the low at 0.37 percent. Risk remains extremely low, but the slight uptick suggests that growth is increasing in tandem.

Even though readings were slightly down to end the first quarter of 2018, the SBLI was still 8 percent higher than the year before. The origination trend has been strong since the Trump tax cuts were announced in late 2017. Lower tax rates combined with higher expected interest rates have probably sparked a rush to get financing while conditions are favorable.

The delinquency and default rates were mostly flat in 1Q 2018. The SBDI grew only 3 basis points in March 2018 to 1.44 percent but are 8 percent higher than a year before. Default rates are flat at 1.84 percent. Despite the slow growth, PayNet projections suggest the default rate will grow to 2.1 percent by the end of 2018.

An industry that continues to see major improvements in its credit conditions is the oil and gas industry. Small businesses within that industry saw its SBLI grow 13.38 percent over last year. In conjunction with that trend, two states with large energy activity, Texas and Ohio, saw their SBLIs grow by 10.80 percent and 8.54 percent respectively. Default rates ran much lower as well as a 4.9 percent rate in 2016 is projected to dip to 2.1 percent by the end of 2018.


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