Banks are delevering around the world as they contend with regs and reduced revenue; prepare to self-finance.
Peruse any quarterly bank earnings report lately and you’ll surely come across the word “delevering.” Delevering is the most fashionable trend in banking worldwide. Earnings call transcripts are abuzz with phrases such as “ongoing delevering initiatives,” or “…the company is in a delevering mode,” along with descriptions of the company’s “divestiture and delevering strategy” or boasts about how much “delevering we’ve done.”
Ultimately what this all means is tighter credit ahead for companies looking for funding from banks (see related story here). At a recent NeuGroup Tech20 peer group meeting, a key takeaway was that the availability of credit sold at a loss will become a rarity except for a bank’s most strategic (and valuable) clients. This will impact the US dollar business of European banks, but also their euro business where some 62 percent of corporates rely almost entirely on bank financing.
According to bankers at the Tech20 meeting, banks are still trying to sort out the implications of the euro crisis, regulation like Basel III (see related story here) and economic uncertainty. In the meantime, they’re leaning toward conservation as conditions rapidly change. Funding costs are going up for most every bank and deleveraging realities are forcing them to again become more selective about who they fund and less predictable as to when they will say no thank you.
That banks are pulling in their lending is perhaps one of the reasons there has been another burst in corporate debt issuance. Last week saw another banner one for companies coming to market. According to Bloomberg, Amgen issued $6bn in four issues ranging from three to 30 year notes. It is reported that $5bn of the proceeds will go stock buybacks. Teva also came to market with a $5bn deal ranging from 1.5 to 10 year notes. The company said it will use the cash to repay short-term debt used for its Cephalon acquisition.
It’s likely Amgen and Teva have read the tea leaves and figured they won’t be getting much help from banks for these kinds of transactions. But there will be no shortage of advice from banks on how corporates should conduct themselves. Another take away from the Tech20 meeting was that will boost their less capital intensive business like transaction banking and advisory work. “We may become more like the big four and strive to do more advisory work than auditing,” one banker in attendance noted.
Banks as advisors was also a theme at the recent Association of Financial Professionals conference in Boston in early November. JP Morgan executives at the conference said one of the bank’s objectives was to grow its role with clients to bring more innovation and advisory support to their finance leadership. To that end it is focusing on broad strategic issues with treasurers and CFO’s, such as helping them build the business case for strategic projects. JPM has taken advantage of the considerable amount of static client data within its databases by developing tools to leverage that data into meaningful and actionable information.
So there will be no shortage of banks cozying up to customers to sell them new products and services. It’s just that they won’t come with open wallets. According to bank analyst Lee Kidder, CCG Catalyst Consulting Group, in a paper titled “Rocks and Hard Places: The Revenue Dilemma Facing Banks,” “genuine relationship banking” is part of the new banking model. “Products and services need to be structured, priced and marketed based on new expectations of long-term customer value instead of short-term product profits,” Mr. Kidder wrote. “This will require banks to ‘devolve’ systems and services into more finite and customizable components that customers can mix and match to suit their individual needs, obviously through online channels at their own convenience. Information for customers must be proactive and predictive, rather than reactive and merely historical.”
The upshot for companies in need of funding? You’re on your own.