Banks aren't lending – but can you really blame them?

From John Stepek, across the river from the City

Dear Money Morning Reader,

Banks seem to be increasingly happy to raise their exposure to the property market, but they still aren't keen to give much money to entrepreneurs.

The number of home loan approvals rose in July, but lending to companies was way down.

Now lots of people are keen to attack banks for that. And they may have a point. But the truth is, with banking balance sheets and the economy the way it is, you can't expect anything else…

Home loans are up, but commercial loans are down

The number of home loans approved rose to 38,181 in July, roughly 70% up on the number of loans seen in July last year, reported the British Bankers' Association (BBA) yesterday. Of course, that's still well below the levels seen when the housing market was last booming – approvals were last at this level in February 2008, and the long-term average is around 60,000 a month. And net mortgage lending was at its lowest since October 2000, with £1.6bn (R20 billion) loaned out.

Perhaps more worryingly, loans to non-financial companies – ie the bread-and-butter companies of the 'real' economy – fell by £4.1bn (R53 billion) in July. That's the largest drop seen yet. The BBA argued that many companies are replacing loans from banks with money "raised on capital markets", and that demand for lending "is subdued across many industries."

Lots of commentators have a tendency to say "yeah, right" when they hear the banks making excuses like this. But I have to admit to having a bit (just a bit, mind) of sympathy for the banks on this score. For every heart-rending anecdote you read in the papers about companies being unable to borrow, there's another company claiming that the banks – especially the government-owned ones - are harassing them to borrow, offering them loans that they just don't need or want.

Not all companies want to borrow now anyway

The fact is that most normal companies are in defensive mode. They are cutting costs, which means making people redundant, shutting down new projects and launches, and abandoning expansion plans. That adds up to lower demand for loans. Why do you need to borrow money if you're not spending any?

Of course, this idea that companies might simply not want to borrow any money is absolute anathema to the government and the rest of the pseudo-Keynesians who seem to believe in perpetual growth at any cost. But this is perfectly natural. The things driving our economy – finance, consumption, property – have sucked in more than their fair share of resources. We need to take a breath, regroup, and find new areas where our resources can be employed in a more productive manner.

Why we shouldn't blame the banks for their stance

At the same time, it's undeniable that credit has become harder to come by for lots of individuals and companies. But like it or not, that's a necessity. Banks might be happy to write loans on properties where they know that the borrower has a fairly chunky equity cushion to protect them if they have to repossess. But if you've got a 10% deposit or less, you're still looking at punitive rates if you can even get a loan.

And I suspect that if you want to open a restaurant or a clothes shop for example, your chances of getting backing from your bank are minimal. But then, I wouldn't lend money to someone hoping to open a clothes shop right now – would you?

So I find it hard to blame the banks for their hardline stance right now. Plenty of pundits argue that we've pumped them up with public money, so they should be doing their job and lending to us. But that view wilfully ignores the fact that we only had to prop the banks up in the first place because they were bust. To then expect a bankrupt bank to start pumping that money willy-nilly back into the economy is unrealistic. You can take issue with the whole way the banks were bailed out in the first place – I do – but you shouldn't be surprised when they then try to use that breathing space to make themselves bullet-proof.

How to profit from the banks' failures

The good news is that, despite the government's best efforts to prevent creative destruction in the financial sector, the credit drought and banking crisis is turning out to be a great opportunity for some companies to take business off the banks. Tesco on the one hand, now has its chance to really stake its claim in the banking sector, by providing potential depositors with a trusted brand name and – by banking standards – a pristine reputation.

And meanwhile, the real sub-prime lenders – the ones who genuinely understand and can cope with the risks of lending to more marginal borrowers – are profiting from the banking sector's mass retreat. This morning, pawnbroker H&T (which we tipped back in February as one of several stocks to profit from the credit drought: Seven companies that will prosper in the recession) saw its share price surge as it reported that first-half profits rose by 48% and confirmed that it expects full-year results to come in at the top end of City expectations. It also hiked its dividend by 25%. The share price is now up by around 39% on February, but with the economic outlook still weak, and gold prices remaining strong, we'd be happy to stick with the stock.

Until next time,

John Stepek

*************
Turning to the markets...

The JSE all share index closed up 0.29% yesterday. The gold mining index climbed 1.46%. Resources gained 1.75%. Banks and financials added 1.05% and 0.82% respectively. Industrials jumped 0.8% and the platinum mining index gained 2.25%.

London’s FTSE100 closed down 0.53%. The Dow Jones added 0.04% and the Nasdaq rose 0.01%.

Tokyo’s Nikkei closed 1.72% down. Hong Kong’s Hang Seng shed 1.26%.

Brent crude is currently trading at $71.29 per barrel.

Spot gold’s trading at $945.07 and platinum was last quoted at $1,233.00.

And here’s how the rand is performing against the major currencies:
R/$7.86
R/£12.76
R/€11.21