In Europe, banks are cagier about credit. Banks are less so in the US, but treasurers should still be wary.
Recently the European Association of Corporate Treasury (EACT) released survey results showing that banks there are still shy about lending. The EACT said banks generally are just more cautious post-financial crisis; but whatever the reason, US treasurers should keep an eye on the experiences of their European colleagues.
The EACT survey, which polled 320 treasurers from across Europe, revealed that companies are still seeing reductions in credit availability, with one quarter of responding companies reporting a reduction over the last year. Between mid-2009 and mid-2010, nearly 20 percent of the companies in the survey said they saw continued cancellations of credit lines by banks. Also, the cost of credit continues to climb, with 55 percent of the companies surveyed reporting that pricing of “uncommitted” lines of credit increased over the last year with 38 percent reporting “committed” line increases.
Although in the US, there’s a slightly different dynamic – there is reportedly abundant lending capacity, which, coupled with slack economic demand, means that banks that survived the crisis can deliver more than what they are being asked for. Additionally, pricing and fees in the US continue to come off their peaks as a reflection of this. But what is important to remember is that this is as much of a story of a lack of demand for credit as it is one of banks having too much capacity to lend. Therefore, it behooves US corporate treasurers to keep an eye on what’s happening in Europe, in case some of that malaise spreads across the Atlantic.
Know thy bank
At a recent NeuGroup Treasurers’ Group of Thirty peer group meeting, a group that comprises large-company treasurers from across a range of industries, members discussed how to better understand the profitability dynamics of their bank relationships—now and into the future.
One theme that emerged from that meeting was one of bank discipline. The idea being that the best-managed banks are likely to be more disciplined even as lending becomes more of a loss-leading, lend-to-play situation. Also, disciplined banks are more likely to be welcoming and open their credit arms for their strategic customers. This supports a trend among credit-worthy corporate customers to put more of their banking business in fewer baskets and to rely on their true lending friends.
Although the crisis mentality among banks appears to be lingering in Europe, things are thawing in the US. But that doesn’t mean treasury should get complacent about its key bank relationships. Knowing as much as possible about the bank’s current attitude, i.e., its financial health (read discipline), is perhaps just as important as knowing the company’s own financial position.