The Loan Market Association’s recent seminar on mid-market UK lending suggests that there is plenty of liquidity for those in that segment that want to borrow and that, at some point, banks are going to have to start making more money from the loan product.
The first quarter of 2016 saw a fall in the number of European loans refinanced of 50 per cent, according to Dealogic. “It was the slowest loan market Q1 in Europe for 14 years,” Matt Osborne, Co-Head of Commercial Banking Origination at HSBC, says. In 2014/2015, borrowers were keen to lock in favourable loan conditions. As a result, Osborne says, “the world has refinanced…only 10 per cent of HSBC clients need to refinance this year and that includes some bridges and one-year deals.”
Moreover, companies are not looking to tap the available liquidity. “More and more corporates are being defensive in their outlook…particularly with macro concerns including commodity prices, emerging market growth and FX volatility,” Osborne says.
The market is also divided over what Brexit might mean. Assessments of the fallout for bank lending vary from “minimal” to “significant”, according to Pinsent Masons, the law firm. Potential issues include the loss of harmonised insolvency regimes across the EU and question marks over whether Brexit would represent “material adverse change” to existing loan agreements.
Also adding to the dampner on internal investment and M&A is the weak pound, which has made overseas assets that much more expensive and the macroeconomic mood to be reasonably downbeat.
Overall, Osborne says, banks face a lot of headwinds, including low interest rates, higher regulatory capital requirements and potential increases in impairments. “At some point,” he says, “banks are going to have to get a better return from lending.” However, he expects the UK loan market to remain “liquid and competitive”.
Ouida Taaffe is the editor of Financial World magazine.