Big Banks Cut Retailer Lending

Three of the largest US banks cut back on retail lending in Q3 2017.

JPMorgan trimmed its total exposure to consumer and retail companies by 3.6% in Q3 to $87 billion, Bank of America slashed its exposure to retailing by 7.7%, while Citigroup pared consumer, retail and health loans and commitments to 16% of its overall corporate portfolio.

According to Moody's Investor Services, "Smaller, highly leveraged retailers are struggling to keep up, which is pushing defaults and downgrades higher."

This news is no surprise as the retail industry has been hit by a drop in consumer spending, and is struggling with a more fundamental shift in consumer behavior, as consumers increasingly prefer digital shopping to physical shopping.

But the reduction in retail lending is not good news for the banking industry. According to Moody's, the retail industry represents 58% of banks' total equity base. As lending to retailers decreases, what will fill the gap? As successful retailers shift strategies from physical to digital distribution, their borrowing needs shift, as well, from construction-related borrowing to more operational-related borrowing.

Amazon, in the past year, has issued more than $1 billion in cash advances to merchants competing on the Amazon platform. The company is well-positioned to determine who the most attractive borrowers--and most attractive retail segments--are, and can acquire borrowers with a near-zero cost of acquisition.

Ron Shevlin
Director of Research
Cornerstone Advisors