Alt Lending Week ending 16th December 2022
Alex Cartoon London Daily Telegraph 5th. December 2022
A picture tells a thousand words. The popular Alex cartoon which shines a light on banking practices and attitudes, this morning featured medium ranking investment banking executive Clive trying to influence his boss on the subject of his bonus. He constructs a list of deals that he has pitched and lost over the last year. His boss points out the paradox of lost deals as being a justification for a bonus. Clive then points out that the banks that won these deals have been left with the underlying assets and that it has therefore cost competitors a fortune. This, of course is very true. When I had to make credit decisions I was aware that that asset had my name all over it perhaps for a significant length of time. Underwriting decisions cease to be an issue once the asset are sold. The credit decision is therefore a snapshot of the moment in time and not a considered view of future prospects. Does this make for considered future risks? I don’t think so. The shadow banking markets are going to find this out to their detriment over the next couple of years. Banks like Credit Suisse are already struggling and so will many of their counterparts.
A note to Bankers – Other creditors are also a threat
It seems like the old days are coming back with a vengeance. In these inflationary times bank relationship managers are going to have to take a good and detailed look at the management accounts of the companies within their remit. Energy costs are going through the roof and businesses are being stretched. British Gas is apparently taking a very robust approach to its credit policies and threatening companies with overdue bills with winding up orders. It is a relatively easy process in the UK although not well known and it is a very blunt instrument. If you wind up a company it no longer remains a customer. Seems as though British Gas has decided that a bigger risk is to let the debt build up and spiral out of control. What it does point out is that bankers need to be able to read and understand the financial statements of their clients and act accordingly. In times like these time is of the essence. This situation is of course coming on top of a steep hike in interest rates which is also going to affect companies which are highly leveraged marginally profitable of both. Unfortunately banks don’t train their credit officers to the same degree these days. To become a lender you had to go through a grounding in business and financial analysis. Looking at the future rather than the past was a big part of it.
UK Mortgage rate spike was market overreaction
It hasn’t taken long for mortgage lenders to realise that the wild west markets of not so long ago were a totally unnecessary overreaction. The UK mortgage lending market is one of the most competitive in the world and god know how much the rush to hike rates so fast and so high has cost lenders in lost business higher administration costs and market reputation? In any case they are now having to make amends as “products” have become uncompetitive. As I have mentioned before the real problem is that these loans are not priced properly in the first place. The situation we find ourselves in today was ideal for a total rethink and an introduction of new thinking but I don’t believe that it going to happen. Mortgage lenders don’t seem to have the intellect to recognize the opportunity which would be good for borrowers and lenders alike.
Howard Tolman is a well know London based ex banker, entrepreneur and IT specialist