In a fawning interview in Monday's Telegraph, Ana Botin, CEO of Santander UK and billionaire's daughter, is lauded for having run a start-up and quoted as saying she will be “accelerating” the expansion of the bank’s small business lending. But does this really justify such fawning tributes, or does the emperor have no clothes?
According to BIS, the stock of lending to UK non-financial corporate businesses was £506bn in December 2011. The department estimates a potential credit gap over the next five years of between £84bn and £191bn for the business sector as a whole, of which between £26bn and £59bn is estimated to relate to smaller businesses. BIS says bank lending may grow, but the ability of bank lending to increase may be constrained by the ability to raise capital and meet higher funding costs. The big four banks control over 90% of the business finance market, leaving the likes of Santander with very little indeed.
At any rate, the important factor here is not the amount that Santander actually dedicates to small business lending. It's the proportion that its small business lending activity represents of its overeall credit creation. Richard Werner, the economist, estimates that UK banks generally dedicate only 10% of their credit creation activity to productive firms. He says that it's critical to grow that proportion because credit aimed at productive firms is the only signficant driver of economic growth as measured by GDP - which is flat. Credit that goes to consumption only fuels inflation, and credit for the purchase of non-GDP assets simply drives up the prices of those assets. In Germany, by contrast, 70% of banks (about 2000 of them) only lend locally and supply about 40% of SME finance.
Against this backdrop, Santander's claims don't merit much attention at all. To achieve it's proposed 'acceleration' of lending to small businesses, Santander UK suggests it will use some of the £2bn capital allocated to its failed acquisition of 316 RBS branches and some of the £1bn it has drawn down as part of the public subsidy given to banks in the form of the Funding for Lending Scheme. The bank announced £500m additional asset financing last Thursday. Yet its gross business lending only stands at £10bn, even having grown 20% year on year since 2009. “This is net new lending,” claims, the CEO, but then says this represents switching from other banks. So it may not be net new lending to SMEs generally, i.e. funding that is going to SMEs who can't otherwise get it.
So, while she talks a good game, Ana Botin and the bank she runs have no clothes.
Image from ElaineByrne.