Mazers on SME Lending in 2009:Q4

The latest Mazers report on lending to SMEs is here.

As usual, Mazars report a very high acceptance rate for credit applications — 87.7% in 2009:Q4. Mazars acknowledge that these figures are skewed to the high side because “limitations exist within bank applications support systems”. In other words, if you call into the local bank branch, have a word with the manager and he tells you there’s no chance of a loan, so you don’t bother filling out the paper work, then this doesn’t count as a loan application that’s been turned down. Somewhat surprisingly, Mazars reckon that “an approval rate of 84% is more representative.”

This still seems to me to be far too high. Mazars own evidence on credit quality provides plenty of evidence for why banks are likely to be extremely cautions in handing out credit in the current environment, regardless of any issues to do with undercapitalisation.

Only 65% of SME loans were fully performing in 2009:Q4.  22% are on “Watchlist” because they are behind 30 to 90 days and 13% are “Impaired” because they are more than 90 days behind. By contrast in 2008:Q2, 85% of loans were performing, 14% were on Watchlist and 1% were Impaired.

These figures show that lending to SMEs is currently a very risky business. Indeed, the fact that 15% of loans were behind on repayments back in 2008:Q2 when the economy was performing much better shows that this class of lending is always somewhat risky.

Personally, I find it hard to believe that the major banks are not currently restricting credit as part of a strategy to get risk-weighted assets down and thus minimise the amount of new capital required to achieve the capital ratio targets set down by the Central Bank. However, in reality, it is very difficult to distinguish between this mechanism and the normal banking approach to screening credit risks during a severe recession.

The fact that this screening often takes the form of turning down loans rather than simply raising the cost of credit has been well understood for a long time and was best explained in this classic paper by Stiglitz and Weiss.

28 thoughts on “Mazers on SME Lending in 2009:Q4”

  1. “Only 65% of SME loans were fully performing in 2009:Q4.”

    Sorry – I posted this comment on the wrong thread. More suitable here.

    … and this is the business area that the ‘good’ Anglo bank wants to get into? Streuth. Give me strength.

  2. Makes you wonder what else is lurking in all our banks (other than the NAMA stuff).

    If the SME loans are so bad, I wonder how the loan book on residential mortgages, cards, loans, etc. is really looking? What is the reality? The last I read, only some 3% of mortgages were in the past 90 days stage.

  3. @karl

    I noticed a caveat on the last page:

    Applications for loans and overdrafts cannot be separately identified in most banks, and as such our analysis has required us to consider both as one credit facility. This is of particular importance given the reliance by SMEs on overdrafts as a form of working capital finance. There were also other cases where it was not possible to split applications by product

    There is no doubting that banks are being very iffy about overdrafts at present. Back in the bad days of the 80s I worked in a company where we met the wage bill (biweekly and monthly) out of a heaving overdraft. Support for invoice discounting is obviously dwindling which again casts a nonsensical light on government intentions to get the banks ‘lending’ again. The banks are retreating back to the asset classes they favoured traditionally as security – no wonder they desire NAMA to put a floor under property values.

    As an aside, because the multinational sector is largely disconnected from domestic SME development, I suspect a pick up in multinational exports will only minimally lift SME woes – just my guess.

  4. The SME loans system would have worked along similar lines to the property business during the bubble.

    In the typical town, there would be 4 to 5 significant accountancy practices and relationships with bank managers and vice-versa would be very important.

    An accountant would be able to steer business to a particular bank and a bank manger with links to developers, solicitors, their stable of SMEs etc would be able to reciprocate.

    Business plan spreadsheets could be tailored for the purpose and when the SME owner wanted to invest in property, all the bank manager needed was a statement of affairs from the accountant listing assets and liabilities.

    Within reason, who would quibble about valuation in a rising market and anyway what would concern the bank manager is having the piece of paper with the accounting firm’s letterhead for “the file,” even though it was worthless.

    It is no surprise that 35% of loans may be in arrears and that it is now more difficult to get a loan – – that wouldn’t be hard.

    In June 2007, a unit of a firm of chartered accountants from the West Cork town of Clonakilty, announced plans to invest a further €100 million in German commercial property. CMC Capital, the Cork-based wealth management and property investment division of Crowley & McCarthy Chartered Accountants planned to raise €20 million in equity for their new German commercial property syndicate from Irish investors. 
     
    CMC Capital had successfully invested €500 million in German commercial property on behalf of syndicate and private client investors since first entering the market in 2004.  This included the purchase, through a joint venture with a UK partner, of Germany’s busiest shopping centre, the A10 Centre outside Berlin, for €245 million. 

    The minimum investment in the new syndicate was to be €100,000 with €10,000 increments thereafter.  The €20m in equity was to be combined with non-recourse finance of 80% ,  creating an expected total portfolio value of €100 million. 
     
    So West Cork farmers although inefficient compared with their German counterparts, may well have been investing the proceeds of Common Agricultural Policy welfare, funded by German taxpayers, on German property.

    In March 2008, Irish farmers acquired a €12.2 million shopping centre in Saarbrücken, in south-west Germany, according to Tralee-based McQuinn Consulting.

    Again, it’s no surprising that the lending scene has changed.

  5. Aha. Glad you mentioned West Cork farmers.

    I seem to recall an allegation made last year when the report came out that “SME” included farming and that many of the loans were made to those who had borrowed for that mad farm waste management programme or something? They were guaranteed back the money from the Department, so the loans were being made really as advances on grants that were definitely coming in (despite one hiccup when the Dept realised that they should have capped the scheme but couldn’t legally weasel out of it).

    Can you discern from that report if the farmers are included this time?

    Pat Farrell got all hot and sweaty when it was raised on Prime Time by that kick-ass blonde who was representing ISME.

  6. @ Sarah Carey

    Total lending o/s by business sector was €33.5bn in Dec 2009.

    There is a category in the report: “Agriculture, Hunting and Forestry” and accounts for €4.4bn. Fishing is a separate category.

    The total value of credit applications in the period October 2009 to December 2009 was for €1,8bn based on 33,192 applications.

    The report notes that the sector “Agriculture, Hunting and Forestry” comprises a significantly larger portion of the total number of applications (28.7% of the total) than other sectors – – about 9,500 applications.

    The FMS Bonanza

    The C&AG said in his 2009 report that the Farm Waste Management Scheme (FWMS), which had no cash limit, initially had a budget estimate of €248 million but farmers had been paid €550 million in grants for the building of slatted sheds and slurry tanks up to Dec 2008. It is now expected to cost €1.1bn.

    €561 million was due to be spent following a jump in late applications ahead of December’s 2008 deadline.

    The scheme cost €21 million in the first year of operation in 2006; €114 million in 2007 and €414 million in 2008. The estimated cost in 2009 was €220 million, to be followed by another €220 million in 2010 and €121m in 2011.

    The farm building scheme was funded by the Exchequer and grants of up to 60% were payable.

    Depending on farm size, 40% to 70% of Irish farm incomes are already funded from the EU Common Agricultural Policy – – so welfare on top of welfare for some who are multi-millionaires.

  7. “Only 65% of SME loans were fully performing in 2009:Q4. 22% are on “Watchlist” because they are behind 30 to 90 days and 13% are “Impaired” because they are more than 90 days behind. By contrast in 2008:Q2, 85% of loans were performing, 14% were on Watchlist and 1% were Impaired.”

    How many of those 2008 loans were performing because SMEs had better access to other sources of credit with which to meet payments?

    I mean, I don’t disagree that lending to SMEs is a risky business right now, but it seems logical that it’s not all one-way traffic.

  8. @Michael

    Thank you so much.

    On this “The total value of credit applications in the period October 2009 to December 2009 was for €1,8bn based on 33,192 applications.

    The report notes that the sector “Agriculture, Hunting and Forestry” comprises a significantly larger portion of the total number of applications (28.7% of the total) than other sectors – – about 9,500 applications.”

    So I think a pointed question might reveal that the FMS is still a factor.

    To be fair though “some who are multi-millionaires” – I think the emphasis should be on “some” alright! Farming has taken a beating just like everyone else for the past few years…..(as for those who sold out and put the cash into bank shares…. ..)

  9. The degree of unreality of perception of the economy is costing us capital.

    What is real and what is completely dependant upon the credit making machine which has gone away for perhaps twenty years? (17 years to go!)

    Lending and investing in the FIRE sectors is a waste of capital. Investment elsewhere may be premature as every sector has been to some degree dependant upon the FIRE and money making “economy”. Malinvestments continue.

    The lack of analysis is unsettling and is something that this web-site might usefully address?

  10. I suggest that cheques which would force a customer into a <=€100 overdraft or <=€100 beyond their overdraft limit should also be considered as credit applications for the purpose of these statistics. Banks are routinely bouncing cheques which are a fraction over.

  11. It’s amazing what lengths we have gone to, in order to avoid defaulting on our debts to foreign bondholders (i.e. international financiers), yet at the first whiff of financial trouble, we rescheduled repayments to farmers who had undertaken works (FWM) on behalf of the State. How is that not a default?

    On the main topic, I am very sceptical of the importance of increasing lending. We hear repeatedly of the need to get credit flowing, but is the solution to our problems more debt? I’d like to think we can grow without net borrowing.

  12. @Ger:
    “at the first whiff of financial trouble, we rescheduled repayments to farmers who had undertaken works (FWM) on behalf of the State”

    Eh? Why were we giving money to polluters to stop them polluting?

    bjg

  13. @ Brian J Goggin

    ‘Eh? Why were we giving money to polluters to stop them polluting?’

    Ermmm- To help the existing government win the last election?

  14. The advantage of lending to SMEs, I suppose, is that it encourages business activity by eliminating the need for entrepreneurs to also be the holders of capital.

    The disadvantage is that it unfairly rewards capitalists and bankers, while providing perverse performance incentives to entrepreneurs. It also encourages ‘entrepreneurs’ to diversify away from their core productive activities into speculative activities such as property.

    Not sure which effect is greater, but my common sense and experience tells me genuine business prospects will find a way to access capital. There are a number of innovative models of microcredit, Islamic financing and profit-sharing that could be used in Ireland to encourage SME lending at much less cost to the taxpayer than the current approach.

  15. @Danny Haskins
    Well, it’s just as well we paid the polluters, then: otherwise we wouldn’t have had the current government, and where would we be in that case?
    bjg

  16. @Brian J Goggins

    Grant aided funding of farm infrastructure always mesmerized me. In the early days of grants for slatted sheds (also part of the pollution containment thinking), farmers were permitted build their own units and self-certify quality and expenditure. The Dept of Agriculture operated a simple cost algorithm based on units size. It meant that a farmer willing to do a deal of self-build or cut corners, could make a profit. Later the Department adopted saner accounting practices. Of course, it was all CAP money in one shape or form.

    One of the most nonsensical aspects of farm development has been the grant aiding of infrastructure for sheep and cattle on holding that were sub-economic. No business plan was required, no evidence of innovation, just a statement of acreage and stock. The result was money literally poured into the ground on land commission sized farms dependent on premia from dry stock (bullocks only). I knew a farmer with a high spec shed for 60 cattle with only forty acres, 12 of which were marsh beside a river. Apologies for straying so off topic.

  17. @ BJG

    Whatever approach you may have preferred, the fact is that it was set up as a State scheme, and after the workers did the work on borrowed money, the State decided not to pay them on time. Now you can argue that they should never have set it up as a State scheme and simply required farmers to do this work by regulation; although i would rejoind that in a common law scheme, that which is not illegal is legal, and therefore it is normal to compensate those who are adversely effected by a change to legislation.

    But whatever about the details, that doesn’t change the fact that the State decided to roll back on a financial commitment to creditors. Albeit, they were polluters -but they had done works on credit and who amongst can say that they do not pollute? Would we think it was OK to welsh on promised funds to homeowners who are retrofitting their homes to a higher energy standard? I certainly wouldn’t.

  18. @All

    Speaking of West Cork farmers – Joe Walshe, Ex FF Mininster for Agriculture, is not available for comment today (rte1 radio right now) on Mr Boucher’s little top up to the ol pension fund (Blind Biddy will love this one &&%$£). Joe is presently ‘public interest’ (which doesn’t exist in law) director on the board of Bank of Ireland. Lovely clubs in Irish Corporate Governance and the games played are too often not quite cricket!

  19. @All contd

    & Now Ned, the East Cork farmer is on Radio, denigrating the present and praising the previous regulator. Suppose they simply show the continuing relevance of the Physiocrats in Irish policy formation and gainsharing on the spoils. Did their serfs ever have it anyotherway?

  20. @Michael Hennigan

    Sorry but you appear to have a very simplistic view of SMEs, accountants and Banks a few years ago. As a SME owner I know for a fact that it was very difficult to get additional credit from Banks for business purposes over the 5 – 6 year period up to 2008. The Banks were focused on property related loans not SME requirements for their businesses. You also appear to be unaware that the socalled close relationships between accountants and Banks ended years ago when the Banks became very heavily involved in insurance/pensions/share dealing/investments etc. SME owners have a brain too and are capable of making their own applications for credit. If there is one thing I hope that the new Regulator brings in for Banks is that he requires them to become Banks again and shed all of their other roles as Insurers, Stockbrokers, Investment Managers etc etc . SMEs might then hope to get a traditional banking service from Banks who might also understand their businesses.

    It does not appear to have crossed the minds of many here that SMEs now have difficulties with their loans because the domestic economy has contracted by more than 10%. Try running a retail,service or farming business in the present climate to find out what it is really like !!!!!!!!

  21. @ Alchemist

    Ireland is a tiny economy, and far from Brussels.

    My understanding of the CAP is that it was a scheme for buying the consent of resistant French and German agriculture lobbies to the planned integration of industry and services. As the core objective of the CAP did not revolve around the agricultural sector, it didn’t matter that much how the CAP money was spent. As long as farming organisations stayed quiet, the job was oxo.

    Now that the farm lobby is broken, and the number of viable farmers greatly reduced, the supports, and the tariff barriers are being dismantled.

  22. Easily known it is Exam correction time!

    Have we witnessed the Banshee wailing over the corpse of Old Ireland.
    Did Ned O Keefe acknowledge in the Dail the end of the Oirish way of doing things?
    Can we end our sub legis ways and operate under Law?
    Is an Independent regulator somthing that politicians fear?

    Time to get a few more foreigners in here!!!
    Tune in on our new discussion thread!

    When the lads finish correcting exams

  23. @Graham Stull

    Do you have experience of private business or of how SMEs are financed?

    Doesn’t a lack of bank finance help the capitalists because they control all the means of wealth creation when credit is not available to those whose main assets are their intelligence, ability and endeavour (“labour” for short)?

  24. “…I find it hard to believe that the major banks are not currently restricting credit as part of a strategy to get risk-weighted assets down and thus minimise the amount of new capital required to achieve the capital ratio targets set down by the Central Bank.”

    Doesn’t this make the case that the new, ore stringent capital requirements should be delayed until the economy has made some kind of recovery? I mean nobody should be against the banks screening for risk (which is obviously higher in recession) but isn’t there an argument for counter-cyclical capital requirements which would avoid squeezing lending now and encourage banks to do their deleveraging when the economy is in a less perilous state?

  25. @Brian O’Hanlon

    Yes I did get to see it – sounds like a can o worms going on out there.

    I also heard some FF guy (forget which of the two on the programme) trotting out the ‘it will cost 70bn to close it down’ line again. I thought they had moved on from that one.

  26. @ Joseph,

    That was BL’s old adversary, Darragh O’Brien, whose background is working in the financial services industry. It was the piece about the printing company I thought was very useful rather than the INBS piece. Prime Time should have been devoting air time to interviews with real people facing real problems in real business, a long time ago. I know that what Prime Time does is to a large degree dictated by what is the daily papers and news. Hence, the name ‘Prime Time’ I suppose. But it’s coverage of the printing business was a new kind of news broadcast, which wasn’t only a televised version of what you can read in newspapers or see on RTE news etc. BOH.

  27. @Brian O’Hanlon – “should have been devoting air time to interviews with real people facing real problems in real business”

    Thanks – you’ve given me some food for thought about documentaries I want to be making later this year.

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