FD Report: Governance, risk and the future of banking

As a worrying outcome of the continued pressure on loan finance, some organisations may be tempted to put their banking needs out to tender – to hunt assiduously for the best and cheapest deals around. In doing so, they consign previously long-standing relationships with their banks to yesterday’s way of doing business.

It is a picture that looks feasible enough as the fallout from the recession rumbles on and as accusatory headlines accumulate – pointing the finger of blame firmly in the direction of the banking sector.

In fact, some commentators suggest that while some companies may well adopt this approach, more enlightened organisations are likely – and would be better advised – to undertake a full strategic evaluation of their whole funding picture if they haven’t already: debt, asset finance and capital. This approach, they say, should not be a means of ruling out bank lending or displacing banking relationships, but of complementing them with other forms of finance and providing banks with an assurance of risk sharing.

Ash Mehta, chief executive at interim FD supplier Orchard Growth Partners, says that the forced re-evaluation of banking relationships that has taken place over the last 18 months is having positive effects on business behaviour. Where once, FDs may have been surprised when relationship managers came back with more and more requests for information, now they anticipate those requests.

“People factor this in now,” says Mehta. “Companies are more prepared in terms of what will get them through the credit committee. And in any case, asking for more information has got to be a good thing for the longer term.”

Greater analysis
Businesses, he says, are now in the habit of asking questions of themselves; modelling different scenarios and probing the assumptions behind the business plan. For some it has become second nature.

“Businesses are taking the whole of the banking relationship more seriously,” says Mehta. “The impact that the banks are having is causing companies to have better governance. It may have been inadvertent but it is quite healthy.”

Gary Davison, capital and debt advisory partner at Ernst & Young, says what is important is an appreciation of where we are in the economic cycle and where the banks stand. Typically, banks track slightly behind other sectors during a recovery. “The credit crunch has come and gone,” he says. “Banks now have reasonably robust balance sheets, but they’re still faced with challenges.”

Bad debt rising
Davison expects the banking sector to grapple with the emergence of more bad debts within their corporate portfolios throughout the rest of this year and into 2011. Legacy debts will only be part of the picture, however. Good businesses that have clambered their way out of recession will emerge with lower valuations. Businesses once worth £100m may only be valued at £70m and the shortfall will have to be addressed – with straight write-offs, with swaps or the selling down of debt. Private equity will undoubtedly play a role, he argues.

So there is still likely to be pain ahead in the short-term before we begin to sense the feel good factor returning to the banking sector. “We still have to get through this period, but for the present and through 2011 we should see a sense of stability being restored to the market.”