Especially in France, crisis-ridden banks are passing on their higher costs to customers in a variety of ways.
European banks are raising fees and widening spreads on dollar loans to corporates in response to their own rising costs of funding. Since early September the region’s banks, especially in France, have seen their credit ratings and CDS spreads deteriorate sharply as worries mounted about their exposure to Euro-periphery sovereign debt.
As the CDS spreads of some French banks ballooned past 400bp last month and money market liquidity dried up, these institutions faced sharp losses on their corporate loan portfolios, since many transactions are typically priced around 100bp or so. Other EU countries’ banks aren’t in equally dire straits, but their funding costs are such that they are beginning to experience negative net interest income in some cases.
Several French lenders have been taking market soundings for sales of performing, high-credit loan portfolios, offering 2-3 point discounts. International Financing Review reported on October 14 that BNP, SG, Credit Agricole and Natixis are either selling portfolios, or making inquiries, in anticipation of the EC’s recapitalization plan, which requires banks to boost capital levels to 9 percent or more.
The regional bank funding pressures have manifested themselves in several ways. First, it is simply harder to get a bank to commit to a dollar loan. Second, banks are asking borrowers to redenominate their loans into euros, which given the all-in costs of a currency swap, can be less expensive than sticking with a dollar loan. To prompt borrowers to do this, lenders are tacking on premia of 25-50bp for dollar loans and adding an additional 25bp to utilization fees.
Whether this is a long-term harbinger of the end of underpriced corporate loans, or a just panicked response to the capital level news out this week, remains to be seen. However, French banks have been passing on otherwise attractive club and syndication deals in recent weeks. That looks bad from a long-term relationship management perspective.