ECB Lending Survey shows widening bank margins

According to the ECB Euro Area Bank Lending Survey for Q4 2012 average bank margins for Enterprises have widened 23% while the tightening of collateral requirements was stable.

In 2013 banks continue to post losses and shrink their Balance Sheets. This is bad news for companies on two fronts.

Firstly many companies who depend on banks for finance will find it more difficult to renew bank lending facilities which mature this year. Secondly, as banks seek to recover profitability, they will seek higher margins and higher bank fees from corporate clients.

Those companies with large loan facilities which mature in 2013 and are not in industry sectors favoured by the banks will have to look at other funding options. Corporate bonds are the favoured option of larger corporates and there has been a lot of activity in this space. However new bond issues will need to be secured on strong and predictable cash flows. Fresh equity and loans from non-banks are also increasing according to the ECB Report.

Where the banks have an appetite for new corporate lending, loan margins are clearly moving higher. The impact of increases in commitment fees and arrangement fees for new banking facilities is however not clear from the survey. The sample group of banks participating in the survey comprises 131 banks, representing all of the Euro area countries.

There is no question that in the credit environment in 2013 we will see considerable restructuring activity particularly in certain sectors like retail where more consumers turn to on-line shopping. Accordingly an analysis by sector would make very interesting reading. Unfortunately the ECB survey as published does not provide a sectoral breakdown of banks’ lending behaviour.