As the fallout from the subprime debacle continues, companies are finding they can no longer rely on their long-standing banking providers for credit. In fact, according to a report by analyst Greenwich Associates, credit is not only tight, but cutbacks on the part of the major banks may be part of a longer-term strategic shift that predates the credit crunch.
“Our research shows that global and pan-European banks have been rationalizing their balance sheet commitments for several years now—even in the midst of the recent credit bubble,” says Greenwich Associates consultant Tobias Miarka. “The big banks do not see credit provision as particularly appealing unless it opens doors to businesses with higher margins, and they have been scaling back their commitments to clients that have the least potential to generate more profitable business.”
The credit crunch has only served to accelerate this trend, says Greenwich Associates, pointing to the fact that in 2005 the 30% of companies using the top 10 European or global banks described their banks as the “most reliable credit providers.” By 2007 that percentage had fallen to 23%.
Indicative of the shake-up that is taking place in the credit market, smaller regional banks are stepping in to fill the gap left by the major banking providers. Although the share of companies using smaller banks as credit providers that described their banks as “most reliable” or “most willing to lend” remained unchanged since 2005 at 22% to 23%, consultants from Greenwich Associates report that smaller banks see the exit of the larger banks as “the best thing that has happened for them in years.”
With credit scarce, some large European corporates, instead of giving money back to shareholders, are also stockpiling cash reserves, which they are placing in long-term investments as insurance against future crises.
While it may make sense for companies to start forming relationships with smaller regional banks, Greenwich maintains that large companies doing business globally should not ignore the large global banks altogether. “It is simply not an option for these companies to divert too much banking business away from the global banks with extensive international networks and cross-border capabilities,” says Greenwich Associates consultant Markus Ohlig.