Defending EF in banks requires asking the right questions

In the first two quarters of 2024, we saw several instances of banks retreating from equipment finance lines of business, a response that had been widely anticipated as a result of the pressures midsize banks have faced in the wake of the spring 2023 bank failures and today’s high-interest-rate environment. As Alta Senior Managing Director Gary LoMonaco points out in an article appearing in May/June 2024 edition of the Monitor, equipment finance provides many potential benefits to bank parents. It can be an opportunity to better serve the client base, diversify the portfolio, or create more attractive returns than in the core businesses.

“The equipment finance product should not be cast aside without fully understanding the risks and opportunities the business holds.”

Gary LoMonaco
Alta Senior Managing Director

“The equipment finance product should not be cast aside without fully understanding the risks and opportunities the business holds,” LoMonaco writes.

In the current environment, where bank-based equipment finance leaders are having to defend their business as consistent with overall bank strategy, knowledge is a key asset.

A third-party review can be invaluable to obtaining a comprehensive understanding of the equipment finance portfolio. LoMonaco frames the question this way: “Do you want to wait for an audit to discover what these portfolios hold, or would a more proactive approach keep the bank in good stead with its various key constituencies?”

In addition to the bank parent, key constituencies also include regulators, who are increasingly focused on portfolio issues. “An informed third-party opinion can often help reinforce management’s perspective on the business to bank management, the board of directors and especially compliance and regulatory officials,” LoMonaco writes in the Monitor.

Preserving future opportunity

The current bank pullback from EF comes on the heels of decades of buildup of the bank presence in this industry. As the Monitor’s Rita Garwood noted earlier this year, when the Monitor 100 launched in 1992, U.S. bank affiliates accounted for 17% of the ranking’s net assets. Last year they contributed 52.9%, and even after bank affiliates demonstrated the largest drop in new business volume since the Great Recession, they still make up 50.6% of the 2024 Monitor 100’s net assets.

This is indicative of the value the EF market holds, and that value will only become more attractive as conditions change, the Fed begins reducing rates and statutory liquidity concerns become less of a driving force within banks.

“Maintaining an EF presence during these challenging times will position a bank for future growth as management priorities shift to asset expansion,” LoMonaco writes. “It is vital that banks not lose sight of the opportunities EF provides for the sake of navigating the current storms.”

Expert review expands understanding

LoMonaco lays out several questions that a bank’s EF unit should be exploring, and that a third-party reviewer can help answer. They include:

• With all the market fluctuations in play, is the portfolio what you think it is? Are there concentrations that need to be managed or explained? Do industry-specific risks need to be addressed and understood? Are there transactions showing early signs of financial stress?
• Are you prepared for regulator reviews and internal strategy discussions?
• Are there opportunities in the EF market that fit your strategy and could drive future growth?
• Is there bench strength in your organization to understand market opportunities and risks?
• Is your residual portfolio a risk or opportunity given recent asset value fluctuations?

Those who participate in the EF market through Lender Finance facilities also need to understand their client base, Lomonaco writes. Leaders should ask:

• Will clients’ portfolios hold up to the scrutiny of an independent review?
• Do you understand your clients’ markets as well as you need to?
• Would you benefit from a dispassionate review of your clients’ strategies and markets?
• Is there a viable exit strategy for your client’s lending facility?

“The time to understand these issues is before a problem arises or an opportunity is missed,” LoMonaco writes. “A thorough understanding of the EF portfolio can help defend its existence and position the product for future success.”

The Alta Group’s Business Assessment Practice is equipped to provide this kind of deep review. Alta’s business assessment advisors have extensive expertise in reviewing, inspecting and analyzing equipment leasing and finance enterprises, and go beyond due diligence to provide robust assessment that meet the complex needs of clients.

Contact us today to talk about how a field examination, a Deep Portfolio Quality Review or our proprietary Due Diligence Plus analysis can enhance understanding of your equipment finance business, enabling you to make better investment decisions and plan for what’s next.

Read the full text of LoMonaco’s article in the Monitor here.