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Heller Financial Bails Out of SBA Program

Heller Financial (HF - Get Report) will exit the small-business lending stage as banks increasingly steal the spotlight.

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Investors backing Chicago firm

Chicago-based Heller said Tuesday it would stop originating Small Business Administration loans in the U.S., effective immediately, citing "much less attractive" pricing and returns. CEO Richard Almeida said the move stemmed from "increased competition from banks focused on capturing the small-business customer by cross-selling a range of financial products."

Indeed, banks have made it a top priority in recent years to break away from reliance on interest-based income and seek more stable revenue growth with fee-based financial products.

"Specifically in the SBA program, competition from banks has increased and pricing has come down," says Robert Napoli, analyst at ABN Amro. "The market share is relatively dispersed. Certainly banks have become more aggressive recently." (He rates Heller buy and his firm has not underwritten for the company.)

Meanwhile, banks are growing increasingly attached to their SBA businesses. First Union (FTU), for instance, transferred the small-business capital unit of the Money Store into its commercial lending division before it shuttered the money-losing subprime lender last June.

Michael Grondahl, senior specialty finance analyst at U.S. Bancorp Piper Jaffray, says Heller's move is "an example of management making a tough decision to shutter a business it didn't feel was meeting their return hurdle rate."

"They made good cross-selling activity" from SBA loans, Grondahl says. "But the landscape has gotten tougher," considering the cost of capital, the analyst says. (Grondahl rates Heller buy and his firm hasn't underwritten for the company.)

At the end of 2000, Heller's SBA portfolio had net assets of $1.4 billion. Still, Heller spokesman Gunnar Branson says the government-sponsored SBA program accounted for just 7% of revenue and less than 5% of earnings in the last year. Created by Congress in 1953, the SBA is designed to help entrepreneurs by providing financing, training and advocacy for start-ups.

Analysts mostly agreed with Heller's decision, saying it would allow the financial company to focus its efforts on its more lucrative business lines, including corporate finance, real estate and health care. "This is a positive move that will allow them to redeploy capital into higher-return and faster-growing businesses," says Napoli. "A lot of companies have been chasing the middle market. You have to have the right mix of technology, underwriting and efficiency to really thrive there," says Grondahl.

Heller, which has $20 billion in assets, said it expects to take a pretax nonoperating charge of $15 million for severance-related costs in the quarter ending March 31. The company said it remains committed to its operating performance targets for the year. Heller will still service its existing SBA loans, which generally run between $100,000 and $3 million.

Heller was lately slipping 51 cents to $34.79, amid pressure on most financial stocks.

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