Banking & Capital Markets

S&P Tracks Sharp Rise in Lending Rates

The ratings service sees pressure continuing from writeoffs and financing costs among banks and brokers.
Stephen TaubAugust 21, 2008

As U.S. banks and brokers have taken huge writeoffs to reflect their poorly performing mortgage investments, they have seen their financing costs rising. And Standard & Poor’s is starting to measure the pressure this is putting on earnings and lending rates.

In one element marking the increase in bank lending rates — based on the spread between lending and borrowing rates — 73 percent of respondents to S&P’s July senior loan officer survey said that the cost of credit lines has risen for commercial and industrial loans to large and middle-market firms. Further, nearly 81 percent of banks responded that the spread of loan rates over a bank’s funding costs had widened.

Now, said in a comment on bank-rate trends from the Global Fixed Income Research arm of S&P, financing costs for investment-grade banks and brokers have exceeded those for investment-grade nonfinancial corporates.

The yield on S&P’s composite index for five-year bank bonds was up to 7 percent as of Aug. 20, compared to 6.5 percent at the end of June, 5.5 percent at the end of December, and 5.4 percent at the end of December 2006. For the same periods, conversely, the Aug. 20 five-year Treasury was down to 3 percent, compared to 3.35 percent in June, 3.45 percent in December, and 4.7 percent the prior December.

Through June, banks and brokers have written down close to $320 billion and raised roughly $250 billion in capital, based on data from 15 large multinational banks and investment banks, the S&P report noted.

“Higher perceived risk, the need to raise additional capital, and hefty refunding needs in the near term have combined to push up the rate at which banks can borrow,” according to the credit rating company.

It pointed out that yields on mid- and long-term bank bonds as well as short-term commercial paper have been moving higher relative to bench market rates over the last few months. S&P stressed that the higher cost of funds will persist and continue to pressure earnings because the core banking business relies on the spread between lending and borrowing rates. To counteract this, banks have increased their lending rates.