Eurozone banks’ asset shedding hits SMEs

Last updated: November 19, 2013 7:23 pm

Eurozone banks’ asset shedding hits SMEs

By Christopher Thompson

Never mind the banks, the bigger impact of next year’s eurozone stress tests could be on small businesses. As banks shed assets ahead of the tests, pruning their assets, lending to companies across the single currency zone has suffered. And the scale of bank deleveraging yet to come is daunting. To comply with new capital requirements Royal Bank of Scotland estimates the eurozone’s biggest banks need to cut an additional €2.6tn from their balance sheets – at €31.3tn collectively in September, they remain among the biggest of any region in the world. That is on top of €3.5tn in asset cuts already made since May 2012.

Lending to non-financial institutions over that period has dropped by €308bn, or 6.5 per cent, and by €361bn, or 7.5 per cent, since November 2011, when outstanding corporate loans reached their peak, according to European Central Bank figures.

Moreover, banks’ corporate lending has fallen month-on-month since July last year, underlining the fragility of the eurozone’s tentative economic recovery.

“The bank stress tests are forcing another, more aggressive deleveraging wave,” says Spencer Lake, head of capital financing at HSBC.

“It is prompting everybody who is still sitting on higher risk-weighted assets to put those out into the marketplace.”

Banks have pulled back their corporate lending in nearly all eurozone countries since mid-2012. But the steepest falls have been in “peripheral” countries, with Spain leading the way as outstanding loans to non-financial companies fell 22 per cent over the period to €651bn.

Lending to small and medium enterprises (SMEs), which account for two-thirds of jobs across Europe and whose health is central to the region’s chances of economic revival, has been hardest hit.

Nor is there any sign of an end to this decline. The ECB warned this month of “continued deterioration” in financing for SMEs, citing the difficulty of procuring loans and a rise in interest rates charged.

SME loans have partly suffered as they require significant capital set aside for potential losses, leading to a “flight to quality” companies among banks, say analysts.

“In general the companies that banks want to lend to don’t need it – they’re already cash rich or can go to market for funding,” says Steve Hussey, head of financial institutions credit research at Alliance Bernstein. “For the ones that need it, banks’ risk adjusted pricing means the companies can’t afford it.”

By contrast, while corporate lending has decreased, banks’ have ramped up their investments in sovereign debt, which requires less risk weighting. Indeed, Europe’s financial institutions are more exposed to their domestic government bonds than at any time since the eurozone crisis erupted.

At the same time growing numbers of eurozone companies are bypassing banks – their traditional conduits of corporate finance – and tapping bond markets. The year to date has seen eurozone corporations issue €325.2bn in bonds, a near record figure.

Like the eurozone’s banking sector itself this has led to a widening split between companies who have access to market finance and those reliant on increasingly risk-shy banks.

“You have a bifurcation in the market between corporates who can access the market, or high yield market, and those without that access for whom it’s a very difficult situation,” says Roberto Henriques, a credit strategist at JP Morgan.

Others argue that more bank deleveraging and SME lending decreases are part and parcel of the eurozone’s wider convalescence.

“A lot of deleveraging has happened and there is more to go, but I’m less alarmed then most people seem to be,” says one senior London-based banker. “The capacity to lend is there but there are no takers… this push to lend is risky by encouraging lending which is not driven by prudent risk management.”

For the moment, though, there is little evidence to show that authorities’ “push” to lend is working.

“The question is how broad Europe’s recovery is,” says Mr Henriques. “Does it remain confined to the core jurisdictions while in the periphery it remains extremely problematic?”