Deloitte: Credit Surge Reshaping Corporate Lending Landscape

Share
A Deloitte report highlights nonbank lending to corporates has outpaced bank lending since 2002
A Deloitte report highlights the rising shift in private credit and its significant impact on the corporate lending ecosystem

The marked rise of private credit in the United States has fundamentally altered the corporate lending ecosystem, challenging traditional banks and offering new opportunities for fintech players. 

A recent Deloitte report highlights this seismic shift, revealing that nonbank lending to corporates has outpaced bank lending since 2002, with the gap widening significantly in recent years.

Nonbank lending witnessing significant growth

Deloitte figures

The report indicates that bank lending as a proportion of all corporate borrowing plummeted from 44% in 2020 to a mere 35% in 2023, while nonbank lending experienced tremendous growth. 

This trend has been particularly pronounced in the realm of private credit, which has evolved from niche strategies like distressed debt to become a dominant force in direct lending.

Per the report, private credit has reached a staggering US$1.6tn globally in assets under management in 2023, rivalling the US$1.4tn US leveraged loan market and the US$1.3tn US high-yield market. 

Even more remarkably, BlackRock projects the private credit market to balloon to US$3.5tn globally by 2028, potentially surpassing the combined value of today's US leveraged loan and high-yield markets.

The impact of this shift is perhaps most evident in the leveraged buyout market. 

Since 2020, private credit has financed more leveraged buyouts than the syndicated loan market, traditionally a multibillion-dollar revenue stream for large banks. 

This displacement represents a significant loss of potential revenue for banks, as they typically collect a 1% fee for syndicating debt.

As private credit firms increasingly collaborate, they are poised to finance ever-larger deals. A notable example is Thoma Bravo's 2021 US$6.6bn takeover of Stamps.com, backed by Ares Management Corporation, Blackstone and PSP Investments.

How banks are responding to a new reality

The report suggests that banks are responding to this new reality with a variety of strategies. 

Deloitte figures

Some are choosing to cooperate with private credit firms, acting as facilitators between their corporate clients and these new lenders. This approach allows banks to maintain client relationships while potentially reducing their credit risk exposure.

Other banks, particularly large institutions, are opting to compete directly by building their own private credit capabilities. These banks can leverage their balance sheets, wealth management divisions, and investment banking groups to raise funds and source deals.

Interestingly, the report reveals a significant disparity in how banks of different sizes are approaching this challenge. US globally systemic important banks (GSIBs) are pursuing multiple strategies, with some experiencing greater success than others in fundraising for bank-owned private credit funds.

Regional banks, on the other hand, appear to be more vulnerable to the rise of private credit. A study by The Brookings Institution cited in the report found that “the lending model of the larger regional banks appears to be most exposed to competition from nonbanks”. 

Surprisingly, seven of the regional banks researched by Deloitte have yet to announce any strategic initiatives to compete or cooperate in this space.

Foreign banks are leveraging their wealth management teams to build capabilities, offering global wealth clients access to US-based private credit exposure. This approach could help them grow their presence in the US market.

The report also highlights the potential impact of regulatory changes, particularly the expected Basel III endgame rules. Bank CEOs have expressed concerns about the constraints these rules could place on their ability to lend, potentially driving more business to less regulated entities like private credit firms.

As the lending landscape continues to evolve, banks face the challenge of balancing strategic moves into private credit with regulatory and economic challenges. 

The report suggests that it could take several years for most banks to fully adapt to these new conditions and effectively deploy strategic initiatives that incorporate private credit.

“Banks should consider identifying their ability to compete or cooperate and create holistic strategies for this new era in credit," the report advises. 

“Failure to develop a strategy could put banks at risk of losing interest and fee income, as well as missing opportunities to arrange and divide deals to better serve clients.”

**************

Make sure you check out the latest edition of FinTech Magazine and also sign up to our global conference series – FinTech LIVE 2024

**************

FinTech Magazine is a BizClik brand.

Share

Featured Articles

Launching in 2025… The FinTech Survey

Shaping the future of finance, FinTech Magazine launches a comprehensive global fintech survey for 2025

Mastercard and Amazon Payment Services ink MEA Deal

Mastercard & Amazon to accelerate digital payment acceptance across nine countries, leveraging Mastercard Gateway technology

Klarna Partners with Adyen for In-Store BNPL Rollout

Swedish fintech giant to launch buy now, pay later services on Adyen's payment terminals across Europe, North America and Australia

FinTech LIVE Dubai - Speaker Sessions

Tech & AI

One Month to Go Until FinTech LIVE London

Financial Services (FinServ)

FDIC Proposes Rules Overhaul for Bank-Fintech Partnerships

Financial Services (FinServ)