International Banks Beat Retreat from Australia Causing Shortfall in Australian Corporate Lending

Post by Sharat on January 5, 2009 · Under Featured Articles, banking, news · Comment

Major international banks are scaling back their lending to Australian corporations in the wake of the global credit crisis as they retreat to their domestic markets and the Australian Federal Government loan guarantee continues to divide the banking sector.

International bank risk aversion to lending in foreign markets is expected to create a funding dilemma in 2009 as billions of dollars in corporate blue chip debt is due to be renegotiated. Banking analysts estimate that A$ 50 billion worth of debt held by international banks may now go unfunded, increasing the risk of corporate default over the next few years. Though some of the slack could be picked up by domestic Australian banks, most analysts believe that Australian retail banks simply do not have the capacity to undertake such a large borrowing requirement.

Figures released by industry regulator APRA last month showed that lending last year fell at several international banks. The research showed that the total value of debt originated by all banks operating in Australia back in January stood at A$ 1.24 trillion and that figure increased to A$ 1.41 trillion in November despite the global credit crisis.

The share of the loans held by international banks fell significantly as borrowers were forced to turn to the domestic majors. In January, French bank BNP Paribas had $8.87 billion worth of loans in the Australian market. That has now fallen to $8.66 billion. The Bank of Scotland has all but pulled out of writing new business. It had been one of the most aggressive negotiators in setting new debt covenants for several corporates in the past few months.

UBS, the top ranked investment bank in Australia, has scaled back its lending with a fall from $5.2 billion in January to $3.97 billion. The Royal Bank of Scotland, which has taken full control of ABN AMRO’s Australian operations, has experienced a $1.56 billion decline in lending. Australia’s leading domestic investment bank Macquarie also witnessed a sharp decline in its lending portfolio, which fell from $17.6 billion to $13.99 billion.

Criticizing The Deposit Guarantee

The international banks initially sharply criticized the Australian Federal Governments decision to only guarantee the deposits held by Australian banks, which led to large scale distortions as depositors withdrew their funds and deposited them with banks covered by the guarantee.

Foreign banks wrote to Prime Minister Kevin Rudd warning that the implications of the guarantee meant that they could not meet domestic loan obligations to Australian corporates, which could result in bankruptcies, and as a result, the Government relented. The Federal Government then extended the guarantee to include locally incorporated subsidiaries of international banks.

APRA’s data shows that there continued to be a strong flow of deposits into accounts held with the Big Four Australian banking majors, and that flow started to occur just before the Federal Government announced the deposit guarantee back in October 2008 and continued well into November.

Domestic retail banks have increased their market share at the expense of international banks with the data showing that there has been an increase in lending by Australian banks to the tune of A$ 200 billion.

ANZ loans have risen from $200.69 billion to $225.14 billion, whilst CBA’s have climbed from $244.9 billion to $292.1 billion and Westpac’s from $204.4 billion to $233.25 billion. The top four Australian banks hold nearly 64 per cent of the corporate lending market.

An analysis of the banking market undertaken by UBS, suggests that in 2009 nearly A$ 50 billion in corporate debt will mature and need to be rolled over, with the situation deteriorating the following year when a further A$ 60 billion matures. Most of this debt is either in the form of syndicated loans or sourced directly from the individual banks themselves by borrowers, rather than from the bond markets.

“It is widely expected that foreign bank lending in Australia will contract and that the major Australian banks will not be able to refinance the whole market,” the UBS report said.

About $17 billion worth of corporate refinancing has been carried out in the past quarter, with some blue chips moving ahead of deadlines to secure funding. “The Australian market is doing quite well at refinancing and deleveraging itself,” one investment banker said.

The retreat by international banks to their core domestic markets will no doubt have large scale implications on the syndicated loan market in Australia. A report by one European investment bank suggests there will be less participation in Australian syndicates by WestLB, RBS, HBOS, Bank of Ireland and Spanish bank BBVA. There is also speculation that other foreign banks may increase their activity in an effort to build a presence. Natixis, CIC and BNP Paribas have all been mentioned as financial institutions looking to enter and participate in Australian syndicate lending.

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