Banks have always been the bad boys of the credit crunch. But is this reputation deserved? And what are they doing to help their customers? Michael Halls reports.
Big Bad Banks. That’s been the more or less unflinching media line on the financial crisis since the credit crunch started in 2007. Big Bad Banks have led the world into the biggest financial crisis ever, so the thinking goes.
And equally they continue to keep us mired in debt.
It’s a pleasingly simple picture. And it certainly suits the recent blame mindset of the public. Bankers now beat estate agents and journalists as the lowest of the low in terms of a profession to aspire to (though where MPs fit on the scale is still unclear.)
So what is the banker’s perspective?
Perhaps the first thing to understand is that banks’ prime purpose is to deliver value to their shareholders.
They are just like any firm in that they have to deliver a profit.
With the UK now in its fifth quarter of negative growth, the banks are also working in a far more risky environment than two years ago.
The three major credit rating agencies — Moody’s Investor Services, Standard & Poor’s, and Fitch — make no bones about their predictions for the coming year. Corporate defaults are going to rise to a high never seen before in the developed western world.
(And even though the consensus opinion among these agencies is that the bottom of the recession has now been reached.) In such a climate, can one expect anything less than banks becoming more restrictive in their lending? So, for example, in the syndicated loan markets, where larger UK manufacturers find credit, the picture is dismal.
Open for business
Katy Packard, relationship manager, manufacturing, Lloyds TSB Corporate Markets says: “Constructing a new banking syndicate is far more difficult now than in the past, when many more banks were willing to lend even without a close relationship with a business.
Companies now need to rely more heavily upon relationship banks which will provide additional funding but also expect a proportionate share of its ancillary business.”
Packard’s statement highlights the difficulties that bankers face. The margin — to the customer the cost of lending — for any borrowing has soared to compensate for the extra risk. The maturity has contracted: five year loans are too risky, three years is much safer. And now banks are demanding that they handle other parts of profitable, if ancillary, business, such as foreign exchange.
But it’s more complicated than that, says Eric Gunn, a divisional director at Clydesdale Bank — interestingly a bank whose business lending has risen by some 14% — around £1.2 billion — according to its first half figures.
Apportioning risk and return is complicated by how different parts of the manufacturing sector can bear the protracted recession.
“The UK manufacturing industry has been affected in varying degrees by the recession, depending on regions and sector,” says Gunn. “Major construction projects such as the London Olympics have helped maintain the Yorkshire steel industry, and food and drink firms continue to see growth as the demand for UK food, both at home and abroad, rises. However, manufacturers that are heavily reliant on UK consumer spend such as furniture, soft furnishings, cars or electrical goods, are arguably the most at risk.
“At Clydesdale Bank we remain open for business. Viable companies with good business plans are able to access finance in the current climate. From a lending perspective, trading companies with good cashflow offer the most attractive proposition at the current time, and it is fair to say that many food and drink or FMCG (fast moving consumer goods) manufacturers fall into this category.”
SMEs rule, EFG mixed vote
The government, however, understands the importance of SMEs. According to the Small Business Service, a government agency to promote SMEs, 97% of the British economy is made up of small businesses, 99% of which employ less than 50 people.
In recognition of such, the government has set up three initiatives to help. One helps provide credit insurance, another looks at using venture capital for start-ups, but the most important is the Enterprise Finance Guarantee, which itself is a beefed up version of the previous Small Firms Loan Guarantee scheme.
With the EFG, commercial lenders will lend to business customers, but in the event of a default or failure, the government will act as guarantor and step in for 75% of any loss.
Most importantly, it will support lending for business growth and development in cases where a sound proposition might otherwise be turned down due to a lack of security.
Small businesses with an annual turnover of up to £25 million can take advantage of EFGs to borrow up to £1 million. In all, up to £1.3 billion of new bank lending will be guaranteed. The scheme was set up in January.
The EFG has provoked mixed reactions, with some claiming that money is being pumped into where it’s needed, while others say that some bank lenders still won’t touch viable businesses because of the risks involved.
That being said, banks such as RBS/NatWest and Clydesdale, in particular, can point to large chunks of EFG lending being made. “To date we’ve led the field in taking applications for the EFG scheme, with over £190 million worth of loans already agreed or in the pipeline,” says Peter Brotherton, director of client coverage in the Manufacturing & Infrastructure Group of Royal Bank of Scotland.
“We’ve seen a significant level of demand for EFG loans from the manufacturing sector, particularly in north west England, north Wales, and the Midlands, where it accounted for a third of all the EFG loans we had provided.” But there has also been negative reactions to the EFG scheme. Towards the end of July, the government’s Business & Enterprise Committee issued it’s 10th report on the EFG scheme. The committee called for banks to play their part in increasing the flow of lending. It accused them of being over-restrictive with their terms and conditions.
“Banks have to play their part in ensuring the scheme’s success,” says Steve Radley, chief economist at the EEF, the manufacturer’s organisation. “There are still too many examples where tighter terms and conditions are being imposed which are turning many manufacturers away from using the scheme. If we fail to unlock this blockage, companies’ efforts to prepare for the upturn will continue to be hampered.” One other new form of support is coming from the European Investment Bank, which introduced a special funding scheme for SMEs in December. Here selected UK banks act as partners — similar to the EFG scheme — in vetting the lending.
The EIB rules say this must be for new production or service ventures, and not for financial transactions like acquisitions. It is only available to SMEs with less than 250 employees. The finance is available for between three to 12 years.
The EIB says it has already signed loans up to the equivalent of Eu200 million (£170 million) this year, and expects to lend between Eu500 million to Eu1 billion this year.
The EIB has chosen five financial intermediaries to dispense this money: Abbey Corporate and Commercial Banking; Alliance & Leicester Commercial Bank (effectively these first two are now part of Santander Corporate Banking); Barclays Bank; Close Brothers; and Royal Bank of Scotland.
There have also been a series of initiatives from the banks themselves, which vary from bank to bank in what many see as a chance to gain new business.
Santander has been one of the most active here.
Lindsay Rix, regional manager for London and the South East for Santander Corporate Banking, says the bank is increasing its customer relationship manager staff by 25%. “That’s about another 100 managers,” she says.
The bank is also developing new products. One of the more exciting for smaller firms is being trialled at a local level with Essex County Council. Here eligible companies can raise up to £100,000 as a loan, with half being provided by Santander and half by the local county.
“The scheme with Essex was only launched in May,” says Rix. “But our plan is now to roll it out over other counties across the country.”