A few weeks ago, I wrote an article entitled Picking Winners. It has since been pointed out to me by a few readers that the opposite is in fact true in banking. That is, banks look into a crystal ball and through the eyes of their credit management try and pick the losers. In other words industries and companies – that in their view – will not survive the current economic cycle. An edict then goes out to all credit foot soldiers that they are not to approve loans to these industries. The phrase “we’re full on this industry” comes to mind. Bring out your dead.
Sadly, this edict is rarely communicated to the relationship bankers (because information is power, communication in banks resembles something that was state-of-the-art in the 19th century). Not unusually, the first they hear of this happy news is when they think they have the deal of the year, spend weeks researching and writing a credit paper, only to be told when the paper is submitted that the bank is full on the name. The banker then has the task of sharing the news with the yet-to-be client. The same client that he/she – just a few weeks ago – was trying to convince to use his/her bank.
Banks often cite reputational risk as one of the areas that they are very concerned about. Translation: If we lend to a proposed new open cut mine in the Daintree is it likely that the newspapers will find out about it? If the answer is yes, they generally shy away from these transactions.
In my employment history I worked for a domestic bank and after consulting with credit we pitched for a large loan transaction to a media company. When we returned to credit with all of the parameters that we thought the client had to achieve now fully achieved, credit informed us that those parameters no longer applied we needed tighter parameters. In other words they were full on the name or industry. Thanks for letting us know.
A few years ago, a horror scenario was unleashed in the property industry where we saw banks re-valuing security and as a result of new (reduced) security values calling in loans. This was in the press only this week.
However, and in the interest of fairness, banks also pick winners. Oh, they don’t make announcements about it. It’s more mundane than that. Banks take a portfolio approach to their lending. Often they will be over exposed to one industry and under exposed to another. How do you know what industries they’re over or under exposed to? Easy, price.
You will recall that over the past few years banks were falling over themselves to lend to all things property. Residential, commercial, development etc. Then a few months ago they ended this folly. How did they achieve the end of the property boom? They increased pricing and lowered LVR’s to investors. In other words, they (and more probably the regulator) felt they were over-exposed to the sector. So, given the mining boom ended long ago and the property boom is over for now (with the possible exception of Brisbane – which is yet to have a boom), what next for our lenders?
The Federal Government has finally appointed a chief scientist and is making noises about picking winners in the technology/renewables sector. Banks have been conspicuously absent from this sector (with a few minor exceptions). Will they now change their tune or will it just be a case of strapping themselves in after the property boom and minimising the losses by boosting their impaired assets teams and increasing their loss reserves?
Our banks have systematically dumbed down over the past seven years. Anyone with a modicum of capability was encouraged to leave. Management levels are stacked with those left behind. Even if they wanted to delve in areas they once did, they have lost the ability to do so. They have become one trick ponies and that trick is property. Oh, there are a few (very few) bankers that have survived by pretending they were never capable of independent thinking, but their chips have been successfully changed and they now operate in the brave new world of process driven, tick-a-box banking.
There is now more money spent on compliance training than product training. Even if banks had the willingness to turn things around and the regulator allowed them to do so, it would take years to train a new breed of bankers.
In the mean time… Bring out your dead.