The conclusion drawn by the Bank for International Settlements (BIS) on the merits of companies switching from single to multiple lenders is set out in a long, algebraic-formulae-riddled working paper. “Our results show that the majority of firms borrow for the first time from a single bank, but soon afterwards some of them start borrowing from several banks,” say the bankers from Basle. To put it another way, their conclusion is: one bank good, several banks better.
The BIS sets out a number of arguments. It says that borrowing from a single bank may be advantageous because it saves on monitoring costs and could make it easier to renegotiate if a company gets into financial difficulties.
But this is offset by the inconvenience of relying on a single bank, since this relationship may allow the lender to develop an “information monopoly” on the customer. Also, as a firm grows it may require access to a deeper base of funding than a single bank may be willing to provide.
The BIS analysis, however, seems to have missed out on a number of key points. First, it should be noted that it is at best grudgingly that banks take on relationships with large corporate customers. There simply isn’t a great deal of money to be made through big ticket lending because this is one of the most competitive sectors of a bank’s business – and it is the corporate customers who in most cases are calling the shots when it comes to setting financing terms. The truth of this is shown by the fact that Barclays, which operates one of the biggest corporate loan books of any UK bank, saw the net interest income in its big-ticket business grow by 1% in the first half of last year – compared with 6% growth for its retail financial services.
One of the reasons for the extreme competition in this sector is that corporates are wise to the benefits of multiple bank relationships. “With three or four relationships, a company can play off one against another and it would be more likely to retain the support of all,” says Martin Cross, banking analyst at broker Teather & Greenwood. “This gives the customer more bargaining power.” In other words, this is one of the few areas of bank relationships where the customer is in control – and where this means something. Banks may not be happy with the tight spreads offered by big dealing with corporates, but to protect their image, as well as a source of income, they cannot afford to lose a multimillion-pound customer to the competition. And as for the customer which gets into in financial trouble, contrary to the BIS assumption about renegotiating being easier with a single lender, once a corporate has been sacked by one bank it might find it difficult to take on another.
At the same time, the banks themselves don’t want to be sole lenders because of the exposure risk, says Philip Middleton, head of banking strategy at KPMG. “Banks want reassurance. So if banks A and B are lending to a corporate, then others will assume it is all right for them to join the group. It’s in everybody’s interests to have multiple relationships. No banker is best at everything and corporates try to get the best relationship they can from every bank. But with 93 relationships don’t expect to be treated like a preferred customer.”
Of course, there are some advantages to a single lead relationship and the most obvious one is that it makes life simple. “If a corporate falls into difficulty it is harder to unscramble it in a multi-bank situation with a lot of people sitting around a table,” says John Hitchins, UK financial services leader at PricewaterhouseCoopers. “But corporates don’t enter banking relationships with that in mind.”
And there is always the possibility of the bankruptcy scenario reversing itself. “If you only have one bank there is a risk, albeit a very small one, that the bank could go bust – so you might not want to have all your money in one basket for that reason,” says Hugh Pye, banking analyst at Robert Fleming Securities. “Also, if your lead banker is aware that this is your only banking relationship they could try to push up their charges.
With more than one bank to deal with, a corporate can play off one against the other to get a better deal.”
So, as the BIS points out, the vast majority of large corporates have switched to multi-banking relationships. In most cases they have a system in which they choose their lead banker or bankers, and then a second tier for specific services such as trade finance, derivatives and other particular products, and they will negotiate a package as it suits them.
Banks themselves favour a multiple relationship because this makes it possible for them to be able to parcel out their exposures. They also much prefer to be able to share out the pain and misery when renegotiating a corporate client’s loans. The dilemma for corporates is to determine what constitutes the ideal number of bank relationships – unhelpfully, most estimates put this between one and 60.
Jules Stewart is a freelance journalist.