US banks target European loans

US banks are increasing their lending to high-grade corporates in the eurozone, after European banks retrenched from many of their long-standing relationships as part of their efforts to de-leverage and free up cash for capital and security reasons.

Lenders including JP Morgan, Citigroup and Bank of America Merrill Lynch, on the other hand, are flush with cash and keen to put it to work to make up for lost earnings in investment banking and trading because of weak markets and new regulation.

“Every bank is using this market to re-evaluate returns on relationships,” said the finance chief of one of the big five US investment banks. “I don’t think you can describe us as wholesale marching into the eurozone waving flags – but we are all seeing opportunities.”

Those opportunities may accrue more to banks with large retail deposit bases, which allow them to fund themselves cheaply. JP Morgan, Bank of America Merrill Lynch and Citigroup all qualify.

European banks have traditionally dominated lending in the Europe, Middle East and Africa region, with French banks in particular coming out on top. BNP Paribas, Royal Bank of Scotland, HSBC, Credit Agricole and Societe Generale topped the tables for mandated syndicated loans last year, according to Thomson Reuters data.

“I would expect the first-half league tables to look very different than they did last year,” said Ashu Khullar, co-head of loan structuring and syndication in the EMEA region at Citigroup.

High funding costs and dwindling access to capital markets are meaning that the economics of lending to corporates no longer stack up. High-grade corporates can gain loans at low rates – Euribor plus 100bp, or plus 150bp for Triple B firms.

By contrast, the banks are funding themselves on a three to five-year basis at 300bp, 400bp and 500bp over Libor on a swap to floating basis.

“Obviously it doesn’t work if you are funding yourself at as much as 500bp over and lending at 100bp,” said Shaun Dreyer, head of syndicated loan capital markets in the EMEA region for Bank of America Merrill Lynch.

Getting aggressive

The European Central Bank last week released data that reinforced the notion that European banks are pulling back. Its January, a eurozone lending survey showed that the net tightening of credit standards by the region’s banks surged in the fourth quarter and the trend is expected to continue.

According to the report, increased market scrutiny of bank solvency risks in the fourth quarter probably exacerbated funding difficulties. As a result, eurozone banks significantly tightened credit terms and conditions and raised interest rates. That has already sent high-yield issues scurrying to tap the US high-yield market. The investment grade nut has proved tougher to crack. 

“European banks are not just going to desert every client”

The loan executives agreed that US banks should not expect to take share easily – even wounded lions will defend their turf.

Building relationships

As US banks look to build deeper relationships with non-US borrowers, they will have to balance the need to boost revenues from lending with the perception of taking on risky eurozone exposure.

The targets are large, investment-grade borrowers with a global reach sufficient to mitigate perceived risk of increasing exposure within a troubled sovereign – just the type of relationship clients that European banks will fight to keep.   

“I wouldn’t expect that all European banks will become uncompetitive,” Khullar added. “These banks will defend their home turf.”    

On a broad level, US banks should gain market share in Europe, said another loans chief at a large US bank. Within that there are subtle points.

“European banks are not just going to desert every client,” he said. “They are going to do what people do when they have to rationalise their balance sheets or deleverage – make choices about who are the key clients and who are the marginal clients.”

All banks have a heightened sense of return and they are reviewing each and every credit request very thoroughly with an intense focus on return on assets and return on equity. If the client is important enough, they will find dollars or do whatever it takes, the banker said. That means for their best relationships they will try to find dollars if necessary even at a premium.

US banks looking to exploit advantage also have to face a potentially weaker market. Many targets of amorous advances from US banks have already refinanced and are out of the market. There was a wall of maturities for 2011 and 2012 that were dealt with last year, with full participation of European banks.

European banks retreating to defend their home turf have already left a hole in emerging markets lending, which Citigroup believes it is well positioned to exploit.    

“Emerging markets are a huge focus for us – it plays to our strength,” Khullar said. “A lot of emerging market borrowers are naturally dollar borrowers because of where they fund themselves,” he said. “It’s a competitive advantage for people with dollars.”    

Khullar is expecting that opportunities in shipping, aviation, project finance – naturally US dollar-based businesses – will continue to tilt away from European banks whose overall capital issues are only exacerbated by dollar funding costs.