Banks scramble for customers on fears that British recovery may pass them by

PUBLISHED : Friday, 14 October, 1994, 12:00am
UPDATED : Friday, 14 October, 1994, 12:00am


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BRITISH banks are once again deemed to be facing a period of disarray - and they include Hong Kong's two largest banks.

Therefore British banks - HSBC Holdings and Standard Chartered Bank among them - have been looking eagerly at the now indisputable recovery in Britain.

The theory is simple: economic recovery means corporate expansion, corporate expansion means demand for money, demand for money means greater loan growth, which means better business and more profits for banks.

However, according to a report by the Bank Relationship Consultancy and the Association of Corporate Treasurers, the banks will find that it might not be so easy to base their own recovery on a perceived growth in corporate lending.

The report does not argue with the theory. Corporate lending growth in Britain is inevitable - unless the current interest rate policy is suddenly abandoned - but the beneficiaries may not be the banks.

Already companies are going to other financial institutions to borrow, leading to a process known as disintermediation.

Bank borrowing by the corporate sector has fallen by 8.3 per cent.

What is worse, evidence is emerging that the banks are trying to reinvigorate demand by adopting much easier credit criteria, reducing margins, and seeking loan book growth, which the report says many would consider imprudent.

It might not appear so bad for banks if it were not for another report, issued by the new Barclays Mortgage Index, which reveals that monthly mortgage transactions through solicitors' accounts have dropped seven per cent.

This figure breaks an upward trend in lending which has been evident since April, and according to the report comes at a time before recent interest rate increases have had a chance to work themselves down to the residential home-buyer.

Such news does not augur well for October.

But for the banks the real concern must be that though there is a recovery and the manufacturing industry is ordering and producing more, the banks are not getting a slice of the action.

On the corporate scene, commercial paper, bonds and private placements are being regarded as preferred borrowing instruments compared to banks.

On the domestic scene, lending is subdued because consumers are truly chastened by the length and depth of the recent recession and, as has oft been repeated, do not believe that the recovery is here to stay.

The bank relationship report indicates that banks are scraping the bottom of the barrel by trying to attract smaller companies with lower credit ratings and cutting their margins.

This is very dangerous stuff, turbulence on the markets at the beginning of the year killed dealing profits, and nothing on the scale of last year, when financial-market profits were swelled to an unprecedented scale, is expected for a long time.

If banks are hoping to bolster balance sheets through greater lending volume, then quality needs to be sustained. Loans for dodgy customers is not the way to do it.