Net Lending to UK Businesses Contracted by £6.5bn in January, Reports BofE

Net lending to UK businesses weakened in January, according to Bank of England (BofE) report ‘Trends in Lending – March 2010’. The stock of lending to businesses has fallen in recent months including for lending to small and medium-sized enterprises (SMEs). Indicators of corporate distress, such as the write-off rate, have risen by less than in the early 1990s and were lower than some major UK lenders expected. Contacts of the bank’s agents reported that the overall availability of credit continued to improve, though by more for larger businesses than smaller ones. The major UK lenders reported that demand for credit remained subdued. The effective interest rate on new lending to companies was unchanged in January.

Recent Lending Data

Official data covering lending by all UK-resident banks and building societies indicated that lending to businesses contracted by £6.5bn in January. As a result, the 12-month growth rate of the stock of loans fell to a new low since the monthly series began in 1999. The major UK lenders reported that their net lending flows remained subdued in February, though were less weak than in January.

For the total corporate sector and for SMEs overall, the stock of lending fell during
2009. However, within the SME sector, the stock of lending to smaller companies increased for much of the year. Over recent months, lending to smaller companies has weakened so that the stock of such lending has also contracted, albeit at a slower rate than for lending to businesses overall. Lenders have reported that smaller companies, like businesses overall, were seeking to reduce debt levels, although smaller companies would remain more reliant on bank finance than larger companies whose access to capital market finance was greater.

The major UK lenders reported that, over the past year, some larger companies had also paid down debt on facilities using funds raised by capital market issuance. Net capital market issuance in January was lower than the monthly average in 2009 and the net amount of funds raised by UK businesses from UK banks and capital markets was negative.

Strong capital issuance during 2009 may have helped some businesses strengthen their financial position. More generally, indicators of corporate financial distress such as the corporate liquidations rate and write-off rate – the ratio of banks’ write-offs on corporate lending to the stock of that lending – have remained lower than in the early 1990s and lower than some lenders expected. Nonetheless, the corporate write-off rate rose further in the year to 4Q09. While some major UK lenders had not seen any increase recently in the number of businesses requesting forbearance measures, they were cautious about prospects for write-offs and insolvencies were the economy to weaken again. Some lenders were concerned that write-offs and insolvencies could rise even as the economy recovered if some businesses with weakened balance sheets expanded beyond their capacity to finance themselves.

The major UK lenders reported that there had been no significant change in loan availability in the past month. The bank’s agents indicated that the availability of credit continued to improve, though by more for larger businesses than smaller ones. The major UK lenders reported that demand for credit remained subdued, which was echoed by the contacts of the bank’s agents.

Corporate Loan Pricing

The total cost of bank finance to a company can be decomposed into the fees charged by the bank to provide facilities, the spread over a given reference rate (typically three-month Libor or Bank Rate) at which loans are offered, and the prevailing level of that reference rate in the financial markets. Contacts of the bank’s agents have continued to report elevated fees on new lending.

Previous editions of ‘Trends in Lending’ have discussed the increase in spreads over reference rates on new facilities since the start of the financial crisis. To an extent, elevated spreads are likely to reflect heightened credit risk and a repricing of risk. But they are also likely to reflect the relatively high cost to banks of raising longer-term funding. Rates on longer-term retail deposits – such as three and five-year fixed-rate income bonds – fell in February, although remain high relative to reference rates. In some contrast, secondary market yields on sterling senior bank debt edged higher in February. Some – but not all – major UK lenders reported a tightening in the availability of longer-term wholesale funding over January and February.

Looking forward, some major UK lenders were concerned about the risk of wholesale funding costs rising as markets increasingly focused on the amount of funding that UK banks would need to refinance over the coming years.

In the most recent data for January, the bank’s measure of the effective interest rate on new corporate lending remained broadly unchanged at 2.2%. Notwithstanding the possibility of higher future funding costs, some major UK lenders reported that competition to lend was continuing to put downwards pressure on loan pricing to large, high-quality companies.


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