Warning to banks: lending first, bonuses second

3 August 2010

Chancellor George Osborne has warned banks that lending to businesses must come before bonuses.

He said the government "would not tolerate banks piling the pressure" onto small firms, and that it was their "obligation" to lift lending.

His comments were made as HSBC, Lloyds Banking Group, Barclays and Royal Bank of Scotland were all expected to announce substantial profits this week.

In an interview with The Sunday Telegraph, Mr Osborne said: "Every small and medium-sized company that I have visited in recent weeks has had some problem with their bank - either they have found it difficult to renew their overdraft or they demanded additional collateral, often someone's house," he said.

"The danger is that, particularly next year, when there is a huge amount of refinancing required, that the small and medium-sized businesses suffer from a lack of access to working capital."

The government announced last month that it is looking at ways to get banks to increase lending to firms. City minister Mark Hoban has said that banks are under scrutiny and business secretary Vince Cable unveiled a joint consultation paper with the Treasury containing options to improve cash flow to businesses.

He said the Financing a Private Sector Recovery paper could propose targeting bank dividends and bonuses as part of a "carrot and stick" approach to boost lending and cautioned banks to be "very, very cautious" about their pay deals.

The bailed-out banks are particularly vulnerable to government warnings on lending to businesses and face combined lending targets of nearly £100 billion to the end of next March. Royal Bank of Scotland (RBS) is expected to say that it is on course to meet its target to lend £50 billion while Lloyds Banking Group (LLOY) will also be eager to demonstrate that it is channeling funds to small businesses. Meanwhile, Barclays (BARC) and HSBC (HSBA) can feel free to turn a deaf ear on the Treasury.

RBS is 83% taxpayer-owned. When it reports on Friday, it is expected to edge to a £200 million first-half profit after barely breaking even a year ago. The bank is also expected to announce the sale of 318 of its branches to Santander for £1.7 billion.

RBS small business chairman, Peter Ibbetson, said the bank was continuing to approve every 17 out of 20 applications for a business loan - the same rate as before the crisis.

"Demand is muted, though," said Ibbetson. Demand is down 25% and when loan applications are received, the amounts being asked for are 25% lower too. He said RBS is scrutinising company cashflows and management accounts now much more than in the past.

RBS has also set up a unit to help businesses turned away for loans by offering them other support such as invoice finance.

Lloyds, which is 41% taxpayer-backed, reports on Wednesday. It is expected to announce pre-tax profits of £800 million, in stark contrast to its £4 billion pre-tax first half loss in 2009.

The British Bankers' Association (BBA) is writing to the chancellor outlining its ideas to counter criticism that banks are failing to support economic recovery and denying loans while rebuilding their capital.

Angela Knight, chief executive of the BBA said: "Banks are well aware of their responsibility to society and our commitment to support the economy by lending to individuals and firms. The return of profitability to the banking sector is a positive sign and indicates that the sector is helping the UK economy move out of recession.

"Banks have made repeated commitments to support business," she added. "There are funds available to lend to firms with a viable business plan. But the industry's ability to support the economy needs to be considered as the increased capital and cash we are required to hold cannot both be set aside and used to finance lending."

But John Mulligan managing director of the Investors' Association said: "The same old issues of the major banks lacking accountability to their ultimate owners still apply. Although HSBC and to a lesser extent Barclays are not beholden to UK taxpayers to the extent of RBS and Lloyds, none of the large banks appear to appreciate the debt they owe to both individual shareholders and UK taxpayers."

He added: "Surely it's high time for the UK government and institutional shareholders, as representatives of UK savers and investors, to get tough with bank directors and say no bonuses until emergency loans have been repaid and dividends restored. Also make sure in future that any bonuses are clearly related to the creation of long term value and not ephemeral trading gains."

Treasury Select Committee member John Cryer MP said: "I would like to see institutions such as RBS making decisions that would benefit employment in Britain, not backing things like the Kraft takeover of Cadbury."

"The profits being announced [by RBS and Lloyds] come from the money we paid in during the Treasury bail-out. The injustice is something that strikes a chord with people."


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