Only the Most Profitable Need Apply?

As compliance with Basel III makes capital more expensive, big banks are trying to be more selective in the companies they lend to, says new research.
Matthew HellerNovember 4, 2014
Only the Most Profitable Need Apply?

Sharp increases in capital costs resulting from Basel III reserve requirements have forced the largest global banks to become more selective about who they lend money to, according to new research.

Although full compliance with Basel III is only expected by the end of 2019, many global banking giants have already met their Tier 1 common capital requirements. In a report released Tuesday, research firm Greenwich Associates says banks have been reshaping their lending strategies to mitigate the costs of compliance.

“Rather than trying to service a broad range of corporate clients, they are dividing clients into tiers and deploying increasingly expensive capital mainly to companies that show the most potential in terms of overall, long-term profitability,” the report says.

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But Greenwich — which polled CFOs, treasurers and assistant treasurers at 465 U.S.-based companies with $2 billion or more in annual revenue — also says banks are trying to be more discriminating in lending at the same time that historically favorable conditions in corporate bond markets and increased competition from foreign banks have created an oversupply of credit in the U.S. large corporate market.

The glut of supply, the report says, has encouraged some borrowers to increase the number of banks with whom they do business. While spreading their business around might pay off for some companies, “others might be hurting their chances of securing banks’ highest levels of service as demand for corporate loans picks up.”

“The reality is, in today’s marketplace you have to be important to a bank to qualify for full service,” Greenwich Associates consultant John Colon said in the report. “And importance is measured in size of wallet and risk-adjusted returns.”

The survey notes that most large banks are focusing on lending to companies with which they hold the lead relationship or at least the No. 2 spot because “these are the only relationships that deliver a big enough ‘share of wallet’ across all bank products and company business to ensure adequate levels of profitability.”