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SMEs suffer in two-tier banking service

Success has proven something of a thankless task for small and medium-sized British companies that have survived the economic crisis, at least in terms of relationship banking and the rates they are offered by banks.

The Financial Director relationship banking survey asked some 500 finance directors to share how their gearing, interest cover and profit margins had done since early 2007 to the present time and how they found the service from their relationship banks during that period.

Measuring the cost of finance and fees relative to bank rate, credit availability and the number of restrictive banking covenants, two tiers of service emerged from recession. Businesses of all sizes experienced similar levels of deterioration on all those measures, but those that emerged from recession not only recovered but improved their position, and large companies often rebounded strongly. But while service levels and rates had greatly improved for large companies by 2011, small and medium-sized entities saw the same services drop off in recession and then continue to deteriorate. Medium-sized companies perceive little change in the past two years in bank fees, security requirements or credit availability.

For large companies, the picture is very different. On two measures, they are happier with their banks now than they were in the pre-recession conditions of 2007. They have seen the benefit of lower costs of funding and relaxation of restrictive covenants, while credit availability has also recovered well. They may have seen fees and security requirements harden during the recession, but these have improved a great deal in the past two years.

Stark differences

Overall, the survey suggests that company financial performance has improved considerably since the depths of recession, particularly in terms of cashflow generation (measured by EBITDA/total assets). Nevertheless, many finance directors feel the situation is worse now than in mid-2009 for cost of finance, fees and security, and covenants. Severe restrictions on credit availability appear to have remained at recessionary levels.


Perhaps the debt-to-secured assets ratio, which has not improved recently, would give the banks cause for concern, although cashflow generation is more important in determining a company’s ability to service borrowings. The difference between small, medium-sized and large companies is stark.

This is at odds with how FDs of all businesses view potential for overhauling the banking sector. Many did not think consolidation had led to reduced service quality, increased cost of credit or reduced availability of credit, and they disagreed strongly with the idea that more regulatory control of banking is needed. Twenty-seven percent of respondents felt losses among the main banks and tighter capital adequacy positions were major factors in banks’ attitudes to their company, but this was outweighed by the 40 percent who felt the attitude their bank took to their business was unaffected by their own weaknesses. Only 20 percent agree that separating investment and commercial banking would benefit their companies, while 40 percent thought it would have no positive impact on the relationship or rates they receive.

These results suggest that stresses in relationships are not caused by factors external to the relationship, such as those emanating from recession. But they suggest that FDs at larger businesses register tensions in the relationship caused by their banks’ own problems more than smaller companies do – one thing, at least, that the latter can say is a little bit of payback for not bringing one of many thousands of insolvencies to their bank’s door.

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