Banking bouncing back?

It’s been a good week for the UK banking community. RBS and Lloyds, heavily indebted to the taxpayer after their bailouts, posted encouraging results which showed a return to profitability.   

Lloyds Banking Group shares leapt by eight percent following the results, which came in ahead of analysts’ expectations. RBS shares actually dropped as investors sold in their droves to book profit, but its first half pre-tax profits of £1.37 billion weren’t to be sniffed at – particularly when set against the £1.68 billion loss in the same period last year.

But dip beneath the headline figures, and cast about elsewhere in the mainstream UK press, and it becomes apparent that it’s not all rosy.

Much of RBS’ profit, for example, was driven by strong performance from foreign exchange, whereas credit produced the worst revenues for two years. Revenue from its asset-backed products and credit markets divisions fell from Q1 to Q2, it said.

But the chief source of criticism of RBS (and its peers – it is by no means alone) has concerned its continued failure to lend to SMEs.

RBS offered £26.7 billion of loans and facilities to UK businesses in H1, it said, of which £15.6 billion was directed at SMEs.  It said loan and overdraft applications from SMEs rose by eight percent between Q1 and Q2, but RBS argued there simply wasn’t the appetite for more debt amongst UK businesses. To address this, the bank said it had “proactively written to more than 1,400 SME customers stating its appetite to lend them more than £1.4 billion”.

There are those though who feel it isn’t doing enough. The Department for Business, Innovation and Skills’ Lawrence Tomlinson, for example, described the behaviour of the UK banking community towards SMEs as “despicable” in an interview with Sky News. Tomlinson alleges businesses had been actively dissuaded from applying for finance before being given the chance to apply, or charged “astronomical” fees.

So who’s right? RBS, for its part, appears to be moving in the right direction both in terms of its overall performance and more specifically in extending credit to UK corporates. The bank has even appointed an independent panel to review lending standards and identify any extra steps that could be taken to enhance support to SEMs in the UK whilst still maintain sound lending practices.

And Lloyds said in its results that its lending to SMEs grew five percent over the last year “against market contraction of three percent”.

It comes back to the unenviable position banks have been placed in by governments and regulators. On the one hand, regulatory instruments have forced banks to delever and reduce risk by removing riskier assets like leveraged loans from their balance sheets. On the other, governments have urged them to increase issuance to small businesses – potentially the riskiest cohort of corporates.

For alternative providers of debt financing, not much has changed – there is still a lending gap that needs to be bridged, and the closure of CLO reinvestment periods moves inexorably closer. Even if banks do make good their promises and bend to the political urge to increase SME lending, demand should still remain strong meaning opportunities for deals continue to present themselves. There are other clouds on the horizon though, not least discussions about the tax-deductibility of interest payments. That really is a debate for another day though…