Here lies the big bank that once loaned billions to local businesses, but is now unwilling and unable to support the economy. Fondly remembered by its risk-adverse managers and overzealous regulators, its passing is deeply regretted by local business owners. Rest in peace.
The eulogy for banks’ business lending has been on the chalkboard for years as massive losses, regulatory pressure and more nimble competitors threaten a perfect storm.
Surveys from the Bank of England chart an almost uniform contraction of lending to UK businesses from banks and building societies in recent years, despite initiatives such as Funding for Lending, which lets commercial banks borrow funds cheaply from the Bank of England so that they can pass it on in the form of cheap lending to companies. A similar downward trend in lending is evident across much of the developed world.
Meanwhile, investors globally have raised almost $80bn to invest in direct lending funds in the last two years, according to data from industry watchers Preqin. New peer-to-peer lenders such as Lending Club and Funding Circle are aggressively hunting for market share, and even insurers want a piece of the lending game. And policymakers including the European Central Bank are pushing for a more developed bond market to make it easier for companies to access non-bank finance.
Yet like other industry experts, including those that do not work for banks, Steve Dwyre, who heads Lloyds Bank lending to global corporates in industry, technology, media and telecoms, insists the narrative is not simply one of alternative lenders such as crowd funders triumphing over unpopular and ailing banks.
“There’s probably too much focus on the crowd and peer-to-peer [sector] which is very small and may well be a flash in the pan,” says Conrad Ford, who runs Funding Options, an online marketplace where small businesses can choose between different capital providers.
Mr Ford analysed a sample of 50 UK small business loans that were sourced through his website in the first nine months of this year with an average loan value of £123,000.
He found that just 18 per cent of loans were met by crowd funding, peer-to-peer lending and wealthy individuals.
Deposit-taking banks were a smaller percentage, at 14 per cent. Still, Mr Ford thinks banks’ lending efforts should not be dismissed to the extent they have been. “You have two [UK] challenger banks which came about the same time as crowd funding, both of them individually have lent far more than the entire crowd funding industry,” he says.
The banks, Aldermore and Shawbrook, have collectively loaned more than £10bn, versus the £5.5bn that has been lent by the UK’s peer-to-peer sector and crowdfunding combined, according to the Liberum AltFi UK Volume index.
Bank lending is enjoying a helping hand from new forces in the market as well.
Credit Data Research is offering credit “passports” to small and medium-sized enterprises with detailed analysis of their finances that makes it easier for them to obtain loans from banks, which are wary of losing money, and to access market finance. The company started out in the Italian market 16 months ago. This year it will expand to the UK, France, Spain and Portugal, says founder Alessio Balduini. It has backing from Moody’s Analytics, the analysis arm of the rating agency giant.
The biggest lenders in Mr Dwyre’s space — accounting for 68 per cent of the 50 loans he analysed — are wholesale funding and debt funds, whose lending is typically short-term.
Among larger companies, funds and wholesale markets (serving banks and other financial institutions) are often the suppliers of choice for longer term debt. Doug Paolillo, an analyst at New York-based data firm Preqin, says direct lending funds typically target loans of five to 10 years’ duration to companies with annual earnings of between $5m and $95m.
Mr Dwyre insists alternative lenders’ success in this space is not a problem. “We don’t want to have the longer term debt on our books because it costs us more,” he says.
“We don’t compete on product, we compete on developing a relationship with a client,” says Alison Rose, head of commercial and private banking for Royal Bank of Scotland. When RBS “can’t help” customers, it introduces them to other lenders, she adds. The British Business Bank, a government-owned service that helps small businesses to obtain funding, wants banks to be compelled to refer small businesses to other finance providers if banks reject their loan applications.
Lloyds is also looking to act as matchmaker between its clients and their ultimate non-bank lenders, by building out its capital markets business. “That’s the big change that came out of this [last few years],” says Mr Dwyre. “We’ve been forced to think about who is on the other side of this trade.”