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Lenders put relationships on line in capital squeeze

January 06, 2012

London's banks face capital constraints. - File Photo.

LONDON: The most lucrative client relationships take years to build, yet the tough lending decisions banks now face could sever them in minutes.

Europe's banks have long discounted loans to clients in order to maintain close links with borrowers so they can win more profitable business from them at a later date.

But they now face intense capital constraints as new regulations and the euro zone turmoil bites, making it harder to afford this practice, and many investment banks are increasingly prepared to bow out of deals with clients as they shrink their balance sheets.

BNP Paribas, Credit Agricole and Societe Generale, among the top lenders in Europe, prominently stayed away from a $6 billion loan for mining group Xstrata last October and a $4.7 billion loan for Qatar's Barzan sealed in December.

More abstentions are expected to follow as banks face funding struggles or difficulties in accessing dollars, as the French banks did. Many are also taking a more hard-nosed attitude when companies struggle to meet the terms on money they have borrowed.

Swiss oil refiner Petroplus is teetering on the brink of bankruptcy after 13 banks froze a $1 billion credit facility that it relied on to buy crude oil.

“Its do or die on both sides,” said a senior banker at a top European firm.

The banker said his firm was “coming down harder on clients than ever before” and that several big companies had reacted angrily to the less lenient lending practices.

Budgets for lending to certain industrial sectors are also being squeezed, which banks do not always prepare borrowers for.

“Discovering at the last minute that you've been turned down for reasons of sector limits can come as a shock to a borrower,” said Martin O'Donovan, deputy policy and technical director at the Association of Corporate Treasurers.

“Treasurers do have long memories and if something comes out of the blue it is upsetting.”

NO MORE CHEAP CREDIT After the 2008 financial crisis, some banks started to formalise the link between cheap credit and the considerably more lucrative fee-based work involved in corporate activity such as mergers and acquisitions or bond mandates.

Bankers even point to anecdotal evidence of letters of engagement being drawn up when a loan is finalised that would commit borrowers to using the banks for other work, though most agreements are made verbally -- still a far cry from the far less explicit arrangements before 2008.

“That (type of demand) comes heavily into any discussion and is more upfront now, with formal undertakings being given by some companies,” O'Donovan said, adding that treasurers were also more realistic about the implied promises they make to banks.

FEWER CLIENTS The result of these changes is not an end to so-called relationship banking, but rather that banks focus on a much smaller client group, typically large multi-nationals that generate high fees because they use a range of products and services.

Royal Bank of Scotland, majority-owned by the British government and in the process of shrinking its investment bank even further, cut its client list from over 26,000 at pre-crisis levels to about 5,000 by mid-2010.

More recently, a form of protectionism not seen since the panic of 2008 has also returned. This is partly the result of political pressure following the taxpayer bailouts of the crisis, and because banks having to prioritise clients will often favour domestic ones.

Germany's Commerzbank said last November it would refuse loans which do not help Germany or Poland, while RBS is ever more focused on its home market.

Some with balance sheets in better shape are bucking the trend, turning to new markets or pouncing on clients being dropped by others -- although the fee potential of any clients is still key for any banks.

Gregory Guyett, head of JP Morgan's global corporate bank, a unit that provides localised lending and services to 3,500 of the firm's top clients, said that its customers numbers had not fallen since the 2007 market peak.

“In fact we are growing the number of relationships we have, particularly in the emerging markets,” he said.

Japanese banks such as Bank of Tokyo Mitsubishi UFJ are among those picking up the lending slack, particularly in project financing in EMEA.

European bankers expect Asian rivals to make a bigger push into the region's bond markets on the back of this in coming years.