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Bank-client relationships are fraying, and TARP capital will do little to stimulate lending to companies in need of funds, say finance chiefs.
Vincent Ryan, CFO.com | US
November 26, 2008
Frosty, with no thaw before the end of next year.
That's the forecast CFOs and other finance execs gave about the state of their affiliations with commercial lenders in a CFO survey conducted in early November. The 115 CFOs and other top-level finance execs who responded said that since September the quality of some services provided by their commercial lenders has deteriorated. A majority said it costs more to borrow; banks are less able to make lending decisions and commitments; and that banks are also less flexible. Surprisingly, 39 percent said that even the range of services and products available from their commercial lenders had narrowed.
Moreover, many CFOs responding to the survey were pessimistic that the federal government's program to inject $700 billion of capital into banks will improve things. Much of the criticism and concern over the Treasury Department's Troubled Assets Relief Program center on whether TARP will prod lenders to start opening the doors to borrowers again in the near-term. CFOs, for the most part, don't believe it will. When asked if the TARP plan will help their businesses in the next two months, 78 percent of survey respondents said they were not at all confident of that.
CFOs are skeptical that banks will set aside an appropriate amount of their newly acquired capital — which they received in return for preferred shares in their company — to lend to commercial borrowers. More than seven out of ten survey respondents said banks would under-allocate resources in this area. Asked to which areas they expect banks will over-allocate resources, 58 percent of finance executives said banks would devote a disproportionate amount to acquiring other financial institutions. Respondents were allowed more than one answer, and 48 percent also thought banks would over-allocate funds to strengthening bank reserves. Forty percent also said that an outsized amount of the $700 billion would go to executive performance and retention payments.
To unfreeze credit markets in the short term, the Treasury's investment in banks has to have the appropriate strings attached, said one CFO. "Otherwise, I believe the money will mostly used to increase reserves."
Said another: "Figure out a way to force banks to use Federal funds to make loans, or take it back."
Clearly, CFOs think the bonds between companies and banks will continue to fray. The distributors of credit will require stricter debt covenants and other business terms in the future, said 84 percent of respondents. That response seems right in line with what loan officers themselves told the Federal Reserve in its October Senior Loan Officer Opinion Survey on Bank Lending Practices. In that survey, the Fed found that 85 percent of domestic banks reported tightening lending standards on commercial and industrial loans to large and middle-market firms over the past three months, a substantial increase from the 60 percent that reported doing so in a July Fed survey.
What's more, 32 percent of the finance executives surveyed by CFO said relations with lenders won't reach some sense of normalcy until the fourth quarter of 2009 or later (4 percent said never, 15 percent by 3Q 2009).
On a slightly positive note, less than one fifth of CFOs (18 percent) said that their changes in their relationships with commercial lenders during the financial crisis have placed their company's long-term viability at risk. But that number could worsen if the skies darken and experts' forecasts of a 4 percent decline in fourth quarter GDP come to pass.
Despite being unsettled by the credit crisis and the state of their financing partners, a large majority of finance execs (83 percent) are confident of the ability of commercial lenders to "support their business adequately in the next year." Which is perhaps why a majority still feel comfortable relying heavily on commercial lenders for basic financial services. Despite the wave of bad news about the financial health of banks since September, the survey found that 82 percent of finance execs are relying just as much on them for treasury management services. Another 72 percent are still turning to them for raising capital. One explanation: companies have few alternatives. For capital-raising, many other avenues remain shut to corporations, although some select companies have tapped the bond markets at premium rates. And to even be considered for a loan these days, corporations usually have to give the lender all or some of their treasury services business.
Finally, when asked what courses of action they would recommend to the incoming Democratic presidential administration, CFOs revealed wide-ranging philosophies on the extent to which the federal government should tighten the regulation of financial institutions and provide a stimulus to the broader economy. For instance, one CFO sided with the banking industry and called for an "immediately suspend mark to market accounting rules," while another insisted that the government "outlaw securitization of original debt. If you make the loan, you keep it," asserted the finance chief. But perhaps the simplest advice was the best: "Execute — stop talking — and do something NOW!" wrote one CFO.