More competition and a feeling that the banks are more willing to lend is injecting some much-needed optimism, find Douglas Friedli and John Sanders.
Stephen Hester, chief executive of The
Royal Bank of Scotland (RBS), could
have expected a severe roasting as
he approached the stand at the Cardiff Hilton
to take questions from local business
leaders. For almost two years the banks have
been accused of failing to back small
companies. But on the day, all Hester got
from the South Wales Chamber of Commerce
crowd was a light grilling, then a warm round
of applause.
It may have been to do with his demeanour: humble, open and self-critical, in sharp contrast to the bullish address given by Barclays chief executive John Varley at Cardiff Business Club a couple of months earlier.
Hester told his Welsh audience: “What will make Britain successful in business is if we get better at serving customers. The UK nationally has not been as good as some other countries in that area.”
He admitted that RBS had made mistakes, but gave this pledge to taxpayers: “We would like you to be able to sell you shares at a profit, for RBS to be a proper asset to the UK.”
Talking to Insider after his speech, Hester said customers would not notice any sharp change in service. “In terms of the day-to-day experience, it’s evolution rather than revolution. One year to another, I don’t think there will be a big change.”
But internally, it will be different: “The banks as businesses are going through huge changes.”
The bank plans to sell its RBS-branded branches in Wales, and keep the NatWest ones. Hester said the RBS and NatWest brands would be “a bit interchangeable”, but that the larger the company, the more likely they will go to RBS. “On the ground, customers never lost confidence in RBS. They never left us. But we can do it better, and we must.”
But what about the common perception that companies can’t get finance? “In a recession people worry more about funding. You have a challenge – how do you lend somebody money if you don’t think they can pay you back? If a company is creditworthy, it can get funds.”
Although the figures give a mixed picture, anecdotal evidence suggests companies are finding it easier to obtain funding from their banks, although UK net lending figures continue to fall.
Based on conversations with member companies, Robert Lloyd Griffiths, Wales director of the Institute of Directors, thinks the situation is improving. “I don’t think the problem has been resolved completely and there’s a long way to go. But there is now a genuine desire by the banks to get the money out there.”
The Federation of Small Businesses (FSB) is even more cautious. Simon Evans, public affairs officer, says: “The best you can say is that the situation is not getting any worse and we are not getting any more horror stories than we were this time last year. But I’m yet to be convinced that things are back where they should be.”
He is certain that the criticism levelled at the banks in the past two years is justified. “Our members tell us that bank lending was a problem. Not only finding new lending, but also existing lending.”
He cites examples of some banks calling in overdrafts at 24 hours’ notice, which resulted in some long-established, viable businesses being forced into liquidation.
Professor Colyn Gardner, chief executive of the Management Centre at Bangor University, agrees the banks have let businesses down in recent years, but does not blame managers in Wales. “I feel a great deal of sympathy for the managers who run the operations in Wales. They have very little ability to influence whether their banks as a whole lend money to small companies, large companies, medium companies, or don’t lend at all.”
For Gardner, the blame lies with top bosses such as Hester’s predecessor, Sir Fred Goodwin. Managers in Wales had nothing to do with takeovers or funding strategies that spawned the credit shortage, he says. But local managers did suffer the consequences when business funding all but dried up. “Their ability to lend was constrained by the foolishness and folly of the people who ran their organisations.”
The banks stick to the line that they remained open for business during the credit crunch and the recession. Staff in Wales are too loyal to confirm Gardner’s analysis in public or speak out against their bosses. Instead, they talk of tough times for all, reduced demand for loans and the normal tendency to reduce debt in a downturn.
But the banks acknowledge that they have adopted a tougher line on lending compared with the boom years.
Jason Evans, Lloyds TSB corporate director forWales, says: “The banks have been more thoughtful in terms of some of the opportunities we have been seeing.”
Similarly Jonathan Brenchley, Barclays head of corporate affairs forWales & West, says the bank has to consider its wider interests when weighing up loan applications. That can, he says, sometimes mean engaging in a difficult discussion about the viability of a client’s business.
Now for the good news. Lloyds says corporate net lending in Wales increased by 21 per cent last year and has continued to rise in 2010. The bank also has deals worth £85m in the immediate pipeline, including £65m for new customers.
RBS says it is approving 85 per cent of lending applications, similar to the level before the credit crunch. However, credit applications have fallen by 40 per cent from the middle of the decade, says Barry Evans, regional director for NatWest and RBS Business and Commercial Banking.
“Our main challenge is on the demand side, so we’ve re-trained our frontline managers to be far more proactive in their approach to customers.”
But Gardner, a former banker, takes the figures with a pinch of salt, saying industry data indicates that banks are lending less now than before the credit crunch. “The banks will say there is insufficient demand and that they are ready to lend. I’m not convinced that is the case. The statistics over many quarters have shown that, net of repayments of loans, less lending is taking place.”
In terms of which banks have been most helpful, Gardner believes RBS and Lloyds – both state-owned for now at least – are trying hard to be more active and supportive of small businesses. But the FSB’s Evans has a different take: “Some of the banks were not as punitive to small businesses as others during the hardest times. Unfortunately some of the worst ones received quite a lot of public money to keep afloat, which was doubly disappointing.”
Whatever the truth about lending volumes, banks are asking for more information when considering loans. “We look for that business plan mentality with numbers to back it,” says Will Clark, Santander’s regional director for the South West and Wales.
Similarly at RBS, while lending criteria remain broadly the same as a few years ago, potential borrowers will maximise their chances by providing up-to-date information. “That factor probably has changed,” says Barry Evans. “Current information gives you a better seat at the table.”
When it comes to large deals, such as funding acquisitions and buyouts, HSBC favours well-run businesses with transparency on future earnings and cash generation. “We have continued to apply the same approach that stood us in good stead before,” says Kevin Beevers, head of leveraged finance in Wales.
The banks accept that compiling plans and projections is more challenging for smaller businesses, but say they adjust their expectations accordingly. But this focus on information may go some way to explaining why some large companies find the purse strings loosening first.
In historical terms, payback times are short and collateral requirements are high, as are margins above the admittedly low base rate. Banks are also reluctant to provide more than 30 per cent of finance for MBOs and other deals compared with 50 per cent a few years ago.
With the credit crunch still fresh in people’s minds, no-one expects a rapid return to the days when money was cheap and perhaps fewer questions were asked. But, with competition is returning to the market, terms and conditions are starting to ease slightly.
As a comparative newcomer to the corporate banking market, Santander is keen to flex its credentials after expanding its corporate banking team from five to 25 in Wales and western England. The Spanish-owned bank handles a dozen business enquiries a day – evidence that it is keeping its rivals on their toes, says Clark, who adds that the bank’s strong retail presence and investment in its brand prove its commitment to the UK.
The Co-operative Bank is also promoting itself as an alternative to traditional players, and has provided funding for housing associations and Cardiff Marine Group.
Many experts believe that giving individual branches more autonomy could liven up competition between banks in Wales. Businesses of all sizes complain about the lack of experienced staff with the power to make decisions in their local branch, while accepting that banking has changed since the days of branch manager Captain Mainwaring from Dad’s Army.
Some banks may be redressing the balance by letting local managers have more of a say. Lloyds is using the phrase “bank manager” in its latest advertising campaign for example; RBS is re-training its corporate staff; and Barclays is increasing the number of business support staff support and emphasising relationship banking. As Brenchley says, “it’s not just about pricing.”
Gardner predicts that any bank that puts proper bank managers back in the branches will soon mop up market share. “There is a huge sense of dissatisfaction among clients, small companies in particular, that feel they have not been supported or treated with any sense of loyalty by these organisations.”
That view is shared by many small businesses, says Evans at the FSB, who urges banks to support viable businesses rather than put the squeeze on them. “It has been a difficult few years for small businesses, in terms of lending as well as having people to speak to at the banks and give proper advice.”
Some make the case for a new commercial bank in Wales to take advantage of the possibly higher than average savings ratio in the country.
Of course, Wales already has locally based financial institutions. The Principality Building Society recently started offering savings accounts for companies. And Julian Hodge Bank in Cardif has been named the thirdsoundest bank in the UK and the 17th in the world. It made a pre-tax profit of £1.2m in the year to October 2009, compared with a loss of £923,000 the year before.
Others would like a Post Office bank to cater for the needs of small businesses. Gardner welcomes these ideas, but urges the country’s political leaders to lobby London-based financial institutions to move more of their operations to Cardiff.
Without a bigger financial centre, he fears that Cardiff – and therefore Wales – will lose out to other UK cities in terms of the support services and spending that banks bring with them. “That is inappropriate,” he says. “Cardiff is a capital city. It should not have a lesser financial institutional presence than a city such as Bristol. It’s crazy.”
Also in: September 2010
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Tax powers could be growth incentive
Here’s one thing you can say for Wales: we are not short of suggestions for how improvements could be made. Bangor’s Professor Colyn Gardner in our cover story says Cardiff needs more bankers. And wind farm builder David Williams would like the planning system speeded up.
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Steve Morgan
Douglas Friedli meets the chairman of Redrow and Wolves, who wants to create a triangle of enterprise in Wales and England.