The loan market’s worst kept secret is out: lending means losses for triple-B rated banks. According to recently published research by Deutsche Bank, even with the benefits of ancillary business taken into account, lenders at the triple-B level do not — on average — make any returns on their lending to European corporate borrowers on a risk-adjusted basis.
What’s more, the research implies that banks will continue to lose money as long as their funding costs remain at elevated levels and the price of loan facilities stays roughly in line with those seen in the bond market.
Lenders have long argued that the loan market is staggeringly mispriced. But they have clung on to the belief that pricing would somehow eventually rise, in tandem with their own financing costs and through pressures of regulation. However, the lack of loans dealflow and the competition from banks scrabbling to put balance sheets to work where they can has meant that prices have, in fact, remained stubbornly tight.
So what will force the much-needed change? Some senior market participants believe that only consolidation in the banking sector will force prices up.
If lending cannot be profitable for those less-well rated institutions, they argue, those banks should not be lending. Although lending as a loss-leader will still continue as a way to break into a company’s wallet of ancillary business, only those banks able to capitalise most on their lending businesses will come out on top. A reduction in competition would not only mean that prices would inch up, but also that the available ancillary business would be shared between a smaller pool.
Consolidation will mean casualties. But for those banks that survive and can continue to participate, syndicated lending will return to being a profitable business — a good result for them but an even better one for their borrowing clients, who will benefit from a stable group of banks that they know they can rely on, come rain or shine.
