Whether through the $1 trillion stimulus package or a separate bill, it is clear that the U.S. Small Business Administration is about to get a whole lot more funding authority in order to help businesses affected by coronavirus. President Trump has already instructed Congress to increase the SBA's funding authority by $50 billion, although when it is all said and done it could be much more.
The SBA has many different loan programs, but the fundamental idea behind all of them is that the government will usually guarantee anywhere from 50% to 90% of these loans, encouraging lending to riskier borrowers. The new money given to the SBA is going to be backed heavily by the government, probably in the realm of 90% or 100%. It will allow the SBA to lend it out to businesses for more widespread use and the loan amounts will likely be greater. This should be a boon to banks that are SBA-preferred lenders, such as Live Oak Bancshares (LOB +3.88%), Wells Fargo (WFC +0.20%), Huntington Bancshares (HBAN +1.69%), and U.S. Bancorp (USB +2.61%).
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More widespread use of SBA loans
SBA loans are usually extended to businesses for strict uses such as the financing of equipment and property needs. But this new funding will be a lot more lenient and allow businesses to cover expenses such as payroll and sick leave. It will also likely waive all loan fees for borrowers and lenders. Becoming a preferred SBA lender is not an overnight process. It is often lengthy and takes a good amount of training to get comfortable with the loan origination process. More documentation and more hurdles come with substantial government backing, so banks that are already approved by the SBA to do this type of lending and are experts will likely get the call.
That's why a company like Live Oak Bancshares seems poised to excel. In 2019, the bank originated almost $1.3 billion in SBA loan volume, about $600 million more than the next best SBA bank (according to data compiled by SBALenders). Live Oak has been in the SBA business for about a decade and makes these loans all over the country, in lots of different sectors. In 2019 alone, the bank added nine lenders to its general SBA team. Knowing how to do SBA lending and having an experienced and large team in place gives Live Oak a huge head start.
Potential for growth
It's hard to say if SBA loans issued to businesses affected by the coronavirus (COVID-19) pandemic will result in any significant net interest income (the difference between what banks pay for capital and what they earn on loans). During a time like this, banks may drop interest rates to very low levels. Congress could even mandate the SBA loans be interest-free or even potentially not be repaid at all. But given that loans will need to be made and with quick turnaround times, this should open the door for SBA lenders that have historically been good at making quicker loans. Given that Wells Fargo, Huntington, and U.S. Bancorp originate many more loans than their peers, these are the banks that will probably excel in making these loans.
The critical need for capital could also push these SBA lenders to originate SBA loan products they have not previously done before. The original coronavirus relief package approved by lawmakers a few weeks ago included $7 billion in SBA disaster loan authority. Preferred SBA lenders don't typically make SBA disaster loans, but they may get the call given that the SBA has never had to disburse so many funds in such a short amount of time.
More SBA could be good in the long term
Remember, relationships are still key for most banks when it comes to generating new business. New customers in desperate need for a loan right now may turn to these preferred SBA lenders in this critical time, and then become long-term customers down the line. After all, what better way to bond than by helping a small business get through a recession or crisis?
As always, this should be the beginning of your research, not the end. While SBA lending could be a big boost for these banks, there's more to the investment case. For example, of these four, only Huntington and U.S. Bancorp currently sport an efficiency ratio under 60% (operating costs divided by net revenue -- lower is better).
But if the extra funding comes to fruition, I would expect top SBA lenders to grow loan volume during a time when projections for the year are likely being dramatically slimmed down.
