29th March 2012
The latest corporate lending figures show that this is not happening. This Telegraph piece shows that loans to the real economy fell in February, "scotching claims that radical long-term refinancing operation (LTRO) would stem the crisis. Open Europe's Raoul Ruparel said: "The LTRO has succeeded in avoiding a severe funding crunch…[But] it does not tackle the underlying lending risks which the banks are still keen to avoid, particularly with the looming recession in Europe."
The ECB figures, given here, suggest that bank-lending growth to the private sector slowed to 0.7% in February compared with the previous year, after rising 1.1% in January. Bank lending growth to companies slowed in February to 0.4% from 0.7% in January and lending growth to households hardly changed at 1.2%, versus 1.3% in the previous month. In the meantime, lending to governments increased.
"Any signs that the ECB money is reaching the private sector "so far are disappointing and tight credit conditions remain a concern for euro-zone growth prospects," said Howard Archer, economist at IHS Global Insight."
The ECB's previously warned that would take several months for the three-year LTROs to feed through to the real economy, but investors would be expecting to see some signs filtering through to the real economy by now.
Recent research by Greenwich Associates suggests that banks are changing their lending practices and this may be the real problem: "Banks across the region have begun segmenting their clients based on profitability. Greenwich Associates consultant Jan Lindemann said: "We anticipate that over time these divisions will become evident among European companies. At the very least we expect that companies will become bifurcated into one group of large companies whose relatively heavy use of advisory services, capital markets, treasury services, and other bank products make them ‘profitable' enough to banks to warrant credit provision, and a group of less attractive companies that experience disruptions in existing lending relationships, less consistent access to credit in the future, and significantly higher prices."
In other words, the very small and medium-sized enterprises that have been designated the engine of economic growth are unlikely to see the benefit of the LTRO because banks are permanently excluding them from the lending process.
Many in the blogosphere believe this is not news: martindv, from The Telegraph community, for example, says: "The money was never intended for the real economy anyway. The Central bank looks after its kin-the banks.Draghi can't sustain companies,but he can bailout buddies of his with created money. The LTRO was, is and will be 'medicine' for the walking dead."
However, all is not lost for corporates needing to borrow. There are an increasing number of alternative providers of finance emerging. For example, US lender Jefferies announced this week that it is to expand its presence in Europe: "The bank plans to establish a financing arm this year in a move that would further expand its fast-growing operations in Europe, where it has quadrupled its workforce to almost 1,000 over the past five years.
"We are working actively to develop corporate lending capacity [in Europe] and have underwritings in process," Brian Friedman, chairman of Jefferies' executive committee, told the Financial Times."
There is also expansion in the corporate bond markets. This blog from Vincent Papa at the CFA Institute shows European corporate bond issuance has surged since 2009 – reaching US$75 billion so far in 2012, up 83 percent over the same period in 2011: "This noted shift by corporates from bank to other forms of borrowing, including debt capital markets, has occurred against the backdrop of the funding crunch faced by both European banks and governments. It would seem justified for European corporates to diversify their funding given that they have traditionally relied on banks for financing."
The phenomenon was explored by Chris Newlands in the FT earlier in the month. In his piece ‘Lending a hand as banks pull back', he explored new sources of financing for companies, such as that provided by asset management groups. He quotes Laurent Garnier, head of structured products at Axa IM: "Investing in mid-cap European corporate debt allows us to offer our [pension fund] clients a way to diversify their credit exposures with an efficient risk return profile."
Bank lending to corporates may be down, but it may not matter very much. There may be a structural shift for banks away from corporate lending, particularly at the SME end of the market, but it should be picked up by others in the market.
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