European banks focus on risk, lend selectively

A street sign is seen in yhis file photo taken in the City of London April 23, 2009. Borrowing is set to stay costly for European corporates as long as a downturn raises the risk of bankruptcy, but banks are continuing to lend and scorn suggestions that they have turned off the tap.

LONDON (Reuters) - Borrowing is set to stay costly for European corporates as long as a downturn raises the risk of bankruptcy, but banks are continuing to lend and scorn suggestions that they have turned off the tap.

Banks face tight capital conditions and need to look hard at prospective borrowers, pointing out that easing terms now could lead to a repeat of mistakes made in the years of cheap credit that triggered a global financial crisis.

"To me my first goal is to defend shareholders' money, avoiding loans which are obviously too risky," said Rony Hamaui, who heads Medio-Factoring, part of Intesa Sanpaolo, Italy's biggest retail bank.

"We are facing a general madness with politicians and media blaming banks for the lack of loans. They suggest us to change our priorities," he said.

Russian Prime Minister Vladimir Putin this week joined a crowd of politicians, central bankers and captains of industry piling pressure on banks to kick-start the economy, saying banks should dole out more loans at lower rates.

The European Central Bank has even threatened to "bypass" the banking system if it felt it had become "dysfunctional," flexing its muscles by saying it was up to "relevant authorities" to ensure banks are lending.

Data show critics have a point -- the annual growth of loans to the private sector in the euro zone, slowed to 1.8 percent in May, its lowest level since 1992.

Anecdotal evidence across Europe also shows investments are delayed because financing is tight.

BIGGER IS BETTER

But while bankers are wary that smaller businesses and consumers will fail to repay their loans and mortgages as the downturn hurts corporate revenues while unemployment rises, there has been no blanket ban on lending.

Very large corporates have been able to bypass the syndicated loan market -- traditionally the first point of call for acquisition financing but which remains virtually shut -- by selling bonds to investors in capital markets.

Life is harder for smaller companies, who need to pitch a lot harder to get their money, and pay more.

"People are not prepared to take risk, and they will only underwrite what they are willing to hold," one investment banker in London said, asking not to be named.

Rating agency Standard & Poor's forecasts the default rate amongst junk-rated companies in Europe to rise to 12 to 14 percent by the end of the year, after it rose steadily to 10 percent throughout the year.

Lloyds expects corporate impairments in 2009 to be more than 50 percent higher in 2008.

Smaller companies need to come up with more details about their business plans and their management teams, and are paying higher prices across the board.

"They are all paying more margin than they did when they last refinanced but that's a different conclusion," said a broker at a mid-market boutique.

"Many of them are being refinanced in the bank market with relative ease," he said.

Maximum debt levels are down, and firms that do not already have a relationship with a bank need a very strong track record to secure lending, or assets to back their loan.

"If you go to the very small end ... those sort of business are a little bit more tricky," said Richard Hall at HW corporate finance, a UK-focussed boutique.

"(Banks) are looking for stuff where they can make good money in terms of margin on pricing and the stuff at the very low end is difficult to come by," he said.

Banks are unwilling to lend more than 2.5 times a company's earnings before interest, tax, depreciation and amortisation (EBITDA), Hall said, down from 4 to 5 times previously.

VIEWPOINTS DIFFER

Germany's influential ZEW economic institute clashed with an industry group this week, saying corporate loans were flowing sufficiently, while the BDI industry association said the country was headed into a credit crunch.

"Both the absolute level and the rate of change in loan volumes compared to the previous year argue against speculation about a credit crunch in Germany," ZEW said.

Government measures to boost lending are also doing their part. In Italy, Berlusconi's government has proposed a standstill on debts owed to banks by small and mid-sized companies, details of which are being negotiated.

UK banks bailed out by the government such as Lloyds and Royal Bank of Scotland have pledged to boost their lending to small- and mid-sized businesses.

"A lot of money is being thrown at UK mid-market companies by government-backed banks," one banker said.

"There is aggressive fighting for mandates in UK midcap at the moment -- intuitively it isn't a good idea but then it's government-backed," the banker said.

(Editing by Sitaraman Shankar)

(Additional reporting by Tiziana Barghini and Ian Simpson in Milan, Judy Macinnes in Madrid, Sakari Suoninen in Frankfurt and Tessa Walsh in London)