Big banks are shrinking and business will be hit
Borrowing is finally getting easier, according to a CBI survey, but don’t bank on it. To shore up their own balance sheets the big banks are planning to severely reduce their lending.
Lloyds Banking Group, after announcing its £4bn first-half loss, revealed to a select group of City analysts that it plans to shrink its balance sheet by nearly a third, most of it by cutting back on loans to customers like the CBI members. Other banks may be less frank but they have the same objective.
Banks were told to lend more when the government bailed them out and they have boasted of high gross lending. But their half-year figures showed most have made only marginal increases in credit or reduced their loan books.
That partly reflects companies seeking to shrink their own balance sheets by repaying debt and cancelling capital investments. There is also evidence from the survey for the Confederation of British Industry that companies are shifting their borrowing problems onto other companies in the supply chain with 25 per cent reporting a deterioration in invoice or payment terms.
And while large firms reported an improvement, small firms said loan availability has got worse.
The CBI nevertheless found firms claiming the first improvement in credit availability since the survey started at the beginning of this year, with 27 per cent saying credit is easier and only 10 per cent saying it is harder to obtain. Half the firms said the cost of finance has risen however.
But that will prove a temporary easing of credit if the banks are to shrink their balance sheets so sharply. For his private audience, Lloyds’ finance director spelt out how the bank intends to solve its problems – and transfer them to its customers.
Lloyds has identified £300bn of “assets outside our current risk appetite” and these will be run down. That is a 30 per cent of its current balance sheet. The bank concedes it will be able to run down only £200bn of that in the first five years, however, but spells out that £140bn will come from customer lending and £60bn from treasury activities.
Business will be hit not only by less lending directly through overdraft and loans, but also indirectly if the banks cut back on credit-card lending and home mortgages too. It may be necessary, but it cannot be pain-free.
