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 After gorging on property lending in the run-up to a financial
crisis, banks are looking to revive high-margin loans to businesses
as the economy emerges from a prolonged slump and bond-trading
income slumps.
But intense competition among lenders only just pulling back from a
turf war on deposit rates risks taking the shine off the turnaround,
companies and analysts warn.
A fight to win over clients will likely squeeze the margins many
hope to make from lending to small and medium-sized enterprises (SMEs),
which are typically charged higher interest rates than larger, less
risky businesses.
Hard-pressed small companies, meanwhile, might still miss out as
banks, burned by borrowers defaulting during the crisis, remain
selective.
"The big challenge will be that banks will be competing for the best
SMEs, but we need to see lending to the rest of the economy in order
for the banks to increase their recurrent revenues," said Rui Croca,
analyst for European banks at ratings agency DBRS.
Getting the lending strategy right will be important to the recovery
of the Spanish banking sector after a 2008 real estate market crash
and a five-year downturn that gutted earnings and left some in need
of state rescues.
Much of Europe has been gripped by a credit crunch. Banks have been
cutting lending as they strengthen their capital, but they also
blame weak demand.
It has been a particular issue in Spain, however, where SMEs make up
more than 99 percent of all companies, employ more people and
contribute more to the economy than the European average, according
to data from the European Commission.
New lending to SMEs has fallen some 65 percent in the past six
years, or by more than 320 billion euros ($442 billion), according
to small business association Cepyme.
It said interest rates stood at an average of about 5.4 percent for
small businesses, more than double the 2.5 percent on loans to
bigger Spanish companies and above the 3.8 percent average charged
to SMEs across the euro zone.
QUARTERLY PROGRESS?
Spain's top seven listed banks, which are due to report
first-quarter earnings starting with Bankinter <BKT.MC> on April 23,
have said they want to fill some of the lending gap, after Spain
emerged from recession in the second half of 2013.
From Santander <SAN.MC> to bailed-out Bankia <BKIA.MC>, the banks
are stepping up campaigns to win clients, with several launching
programs in recent weeks totaling at least 80 billion euros in loans
aimed at small firms.
"The future of (Spanish) banks rests with companies," Banco Popular
<POP.MC> Chief Executive Francisco Gomez said at a recent conference
in Madrid.
Most of the top seven suffered a drop last year in recurring net
lending income as credit fell, and instead many reported a leap in
trading gains.
Many have relied on the "carry trade", using cheap European Central
Bank funds to buy higher-yielding Spanish sovereign bonds. But that
crutch is disappearing as banks shrink these exposures ahead of
Europe-wide health checks.
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Some lenders recognize that industry rivalry and falling rates on
loans could limit their upside.
"Of course we are going to notice pressure on margins," said
Santander CEO Javier Marin as he unveiled a plan in March to expand
new lending to small companies by 24 percent to 30 billion euros
this year. Santander aims to lend the funds at between 3 percent and
5 percent.
Banks usually make more from lending to companies than on home
loans. On new mortgages in January, Spanish lenders earned an
average 2.59 percent over the Euribor reference rate which tracks
the average interest euro zone banks charge each other to borrow,
according to a recent report from JPMorgan.
That compared with 4.74 percent over Euribor on corporate loans of
under 1 million euros.
EXPORTERS TARGETED
So far there is little evidence of a step change in lending. New
company loans of under 1 million euros were up 6 percent in February
compared to a year ago, Bank of Spain data showed, but those above
that threshold were down 32 percent.
Many banks predict their total loan stock will keep falling in 2014,
as borrowers, including households, pay off debt.
"The circumstances don't really lead us to be able to predict a
rapid reactivation of credit, although it is likely we will see a
slight improvement this year," Cepyme Chairman Jesus Maria Terciado
wrote in a recent article.
Cepyme has estimated that at least 50 percent of the 240,000 small
companies that ceased to trade in Spain between 2008 and 2013 closed
because of a lack of financing.
Across Europe, this shortage has pushed businesses to seek
alternatives, such as private equity loans.
Spain's center-right government, which last year called on the ECB
to create a cheap funding scheme for SMEs, has also recently passed
measures to try to ease companies' access to bond markets and other
financing avenues.
Small companies which export — about 150,000 businesses, according
to Santander's Marin — may be the biggest beneficiaries of banks'
fresh lending attempts. Spain had well over 1 million SMEs at the
end of 2013.
"It's true that we're all talking about exports. But we're not going
to leave aside any SMEs for not being exporters," Marin said.
Analysts said banks still had incentives to restrain lending,
however, as they face Europe-wide health checks later this year.
"Banks probably need to start taking some risk, though they are
going to be cautious as they are subject to the European stress
tests," Croca at DBRS said.
(Editing by Fiona Ortiz and Jason Neely)
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