'Imprudent' loans will hit bank margins
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Your support makes all the difference.BANKS are in danger of relaxing their lending rules and cutting loan rates too much to hang on to corporate customers, according to an annual survey of corporate banking by the Association of Corporate Treasurers and the Bank Relationship Consultancy.
Most are planning to increase lending at an imprudent rate and will need to reduce their margins to do so.
Banks are paying the price for being over-cautious about lending during the recession and companies are increasingly turning to other sources of funds now that recovery is under way, the survey says.
Companies indicated that they planned to finance expansion using 'disintermediated' sources of debt finance, such as bond issues, commercial paper and private placements. New bank loans were the last choice of the 400 companies surveyed.
The number of companies seeking new funding from other sources is set to rise, according to the report. The alternatives are no longer restricted to the biggest companies with the highest credit ratings.
Alastair Winter, one of the authors of the report, said the alternative sources of funds had become cheaper and easier for many companies to tap. In addition, he said: 'Commercial banks may have alienated some of their customers by being over-cautious and over-selective over the last three to four years.'
Gerald Leahy, director-general of the Association of Corporate Treasurers, said: 'It is still the biggest companies that have the best access to capital markets, but banking relations go in cycles and we are seeing a swing away from close relations.'
Despite the increased competition to lend to companies, 70 per cent of the banks surveyed said they planned 'substantial' growth in loans. Three-quarters of these hope to expand their loan books by more than 5 per cent and many reported planned increases of more than 10 per cent.
To fulfil their plans, many have widened their net to take in smaller customers with lower credit ratings. The survey found banks' preferences had shifted to companies with turnover of pounds 76m to pounds 500m. More stated a preference for lending to unquoted companies.
The banks also expected to reduce their interest charges, even after aggressive price cuts over the past 12 months. Interest margins on loans have already fallen from about 0.25 per cent above the base rate a year ago to as low as 0.05 per cent in some cases, Mr Winter said. Yet bank lending to companies has fallen by 8.3 per cent.
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