Uptick in Business Spending Raises US Bank Hopes

Two-and-a-half years after the official end of the recession, businesses are starting to invest cash again, prompting bankers to hope they might start borrowing, too.

Consider Jim Burg. It has been a year since steelmakers started having trouble finding trucks to haul loads for the reviving auto industry. So Burg, whose company is based in Warren, Michigan, is finally about to borrow money from a bank to build his fleet of flatbed rigs to 85 from 70.

But Burg is taking the step carefully. He accumulated far more cash reserves than he has ever had in his previous 28 years in business. He also lined up bank credit lines in excess of what he needs to operate.

"We put in a very conservative business plan," said Burg. "Look what happened in the second quarter of last year when the tsunami hit Japan. That affected us directly."

Burg's story is a common one that bankers say gives them at least a little hope. They expect investments like those Burg is making will drive the economic recovery and bring additional borrowing and interest income —even as they recognize that in this day and age, businesses are mostly averse to debt.

"Companies are going to continue to increase productivity and generate cash," which they can use to build inventory, said Laura Whitley, commercial banking head at Bank of America Corp. [BAC  Loading...      ()   ] "I do not necessarily see them borrowing."

No borrowing surge

While banks large and small are certainly making more business loans, they say most of the money has been borrowed to replace worn-out equipment or to refinance existing debt. Businesses generally have not been borrowing to grow, making people like Burg a notable exception.

Bankers and analysts say they do not see a big surge of additional borrowing in the near term, following the strong growth of the last three months of 2011, when business loans outstanding at U.S. banks increased at an annual rate of 13.1 percent, according to Federal Reserve data.

A portion of that growth came from U.S. banks taking market share from retreating European banks and from the corporate bond markets, not from additional borrowing. Also, some of the surge came from companies hurrying to take advantage of an expiring tax investment incentive, said Christopher Mutascio, a stock analyst at Stifel Nicolaus & Co.

Initial data since December points to slower loan growth, said Mutascio. That would be a disappointment to investors who had recently been bidding up bank stocks in anticipation of another strong step up in business lending, he added.

Meanwhile, companies continue to take in cash profits from their operations that they can invest instead of borrowing. U.S. businesses piled up a record $1.6 trillion in bank deposits and money market funds through the end of September, according to Federal Reserve data. Bankers say companies continue to add to their deposits.

"Corporate America built and continues to hold an extraordinary amount of cash," said Terry Turner, chief executive of Pinnacle Financial Partners Inc, a Nashville, Tennessee-based bank that specializes in commercial and industrial loans. "That serves as a damper on loan demand."

In Huntersville, North Carolina, engineering giant ABB Ltd [ABB  Loading...      ()   ] of Switzerland is using its own cash this year to build a $100 million factory to make cables to transmit high voltage electricity, said Ismo Haka, the company's chief financial officer for North America.

ABB is keen on keeping debt low and cash high.

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