Britain’s smaller banks jostle for business banking grants

Updated 10 December 2017
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Britain’s smaller banks jostle for business banking grants

LONDON: Britain’s smaller banks are lining up to apply for multimillion-pound grants the government hopes will help them compete in the corporate banking market.
For years the government has wanted to reduce the dominance of big banks in the small to medium-sized business (SME) banking sector. The four largest — HSBC, Barclays, RBS and Lloyds Banking Group — control more than 70 percent of business current accounts.
Royal Bank of Scotland was directed by the government and the European Commission to set up two funds worth a combined £775 million ($1.037 billion) following its £45.5 billion bailout during the financial crisis, seen as an unfair boost to RBS.
“A consequence of the 2008-9 crisis was that there was huge consolidation in financial services,” said Anne Boden, CEO of digital Starling Bank, which launched in 2014.
Applications for grants from the funds open next year. One, worth £350 million, will be used to encourage customers to switch providers, while the other £425 million fund will help challenger banks invest in their SME offerings.
The fiercest competition is expected to be over six grants making up the bulk of the second fund and focused on current or soon-to-be business current account providers.
At least 12 banks are likely to be eligible for just the first two pools of funding containing the six biggest grants.
Virgin Money and Starling Bank have set out plans to enter business banking in recent months while the CEO of app-based bank Monzo told Reuters it was now also tempted to move into the sector, having previously ruled this out.
Its chief commercial officer Hugh Chater recently told investors that its proposition, offering customers access to partners’ services, would provide a “compelling case” for funding.
Starling plans to have its service off the ground before it applies, allowing it to bid for one of the three biggest grants ranging from £60 million to £120 million and earmarked for firms already up and running. Unsuccessful firms will be considered for other pools of grants.
“We are very uniquely placed in this ... and confident of our ability to win,” said Starling’s Boden, while agreeing competition was heating up.
“I think that (the funds) are probably not enough. It could have been much more.”
Another digital player, Tandem, is set to acquire a banking license and business banking unit if its takeover of Harrods Bank is approved and plans to apply for all four pools of funds on offer.
“It (competition) is kicking off now,” said Ricky Knox, CEO of Tandem.
“It’s not reached a scale where there is serious acknowledgement of it, but we’re going to see a really interesting two to three years.”
Clydesdale and Yorkshire Bank (CYBG), TSB and Metro Bank are also in the running.
CYBG is currently piloting a business e-lending service and expanding in Birmingham and the West Midlands, moves that set it up to apply for the three biggest grants.
TSB also has plans to expand. Its CEO Paul Pester said in November it will be at the “front of the queue” for funding.
Santander fits the criteria, but its eligibility has drawn criticism given its parent, Spain’s Banco Santander, is one of the world’s biggest banks.
Santander UK CEO Nathan Bostock said the bank has the reputation and proven capability required to convince customers to switch.
“We will create some things we feel will help customers make that choice,” he added, referring to new products or services the bank will offer as part of its application.
Bostock noted that it has historically been very difficult to win market share from the big four banks. They have dominated the market since 1970, according to a 2016 government report, and suffered relatively little erosion of their market share despite numerous entrants to the market.
Switching rates remain low, at about 4 percent in 2014 according to the Competition and Markets Authority, although thousands of firms have been mistreated by major lenders in the past. Some accuse RBS of pushing them into bankruptcy to pick up assets on the cheap during and after the financial crisis.
The grant scheme was set up as an alternative way to boost competition after RBS found it was unable to sell its business banking unit Williams & Glyn.
The plan targets a transfer of 3 percent market share from RBS to challenger banks. The unit has around 220,000 SME customers.
— Reuters


Liquidity squeeze hits sukuk sector

Updated 53 min 53 sec ago
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Liquidity squeeze hits sukuk sector

  • US interest rate rises and the end of the Federal Reserve’s quantitative easing program have lessened dollar availability
  • Investors from developed markets are more reluctant to park their money in assets from further afield because the returns they can achieve nearer to home are increasing

BARCELONA: Shrinking liquidity as central banks rein in years of ultra-loose monetary policy is crimping both demand for sukuk as well as supply.
Last year, issuance of Islamic bonds, or sukuk, reached a record high of $95.7 billion, up from $68 billion in 2016, according to S&P Global Ratings, which forecasts 2018 issuance will total up to $80 billion.
US interest rate rises and the end of the Federal Reserve’s quantitative easing program have lessened dollar availability, while the European Central Bank’s decision to lower and then stop its own bond-buying program in December is exacerbating liquidity constraints.
“Liquidity that used to be channelled to the global sukuk market is becoming scarcer and more expensive,” said Dr. Mohamed Damak, senior director and global head of Islamic Finance (Financial Services Research) at S&P Global Ratings, who estimates Europe and the US provide 20-40 percent of sukuk investment.
“That will impact the capacity of sukuk issuers to the tap the sukuk market over the next 12 months.”
Investors from developed markets are more reluctant to park their money in assets from further afield because the returns they can achieve nearer to home are increasing in line with higher rates and a strong dollar.
“Whereas before when there was so much liquidity, investors were almost desperate in the hunt for yield and sukuk. Now, they’re a bit more discerning and spreads on emerging markets, including sukuk instruments, have started to widen,” said Khalid Howladar, managing director and founder of Dubai’s Acreditus, a boutique risk, ratings, regulatory and Islamic finance advisory practice. “You’ll see more discrimination coming into sukuk pricing.”
In the first nine months of 2018, sukuk issuance in Gulf Cooperation Council (GCC) countries totalled $26.9 billion, down from $39.8 billion in the prior-year period, according to S&P. GCC sovereign issuance fell by nearly half over the same period to $14.8 billion from $27.9 billion, although issuance by regional corporations rose 2 percent to $12.1 billion.
The decline in government sukuk issuance is partly due to the rebound in oil prices, analysts said, with crude now trading at more than $70; Gulf governments had historically funded their spending through energy receipts and conventional bank lending, with little need to issue debt, but the slump in oil prices from mid-2014 forced a rethink.
Saudi Arabia began issuing debt for the first time since the 1990s after falling into deficit and has now sold $11 billion of sukuk — $9 billion in April 2017 and $2 billion in September 2018, plus $41 billion of conventional bonds since 2016, according to Reuters. These have helped Saudi Arabia fund its budget shortfall, while the Kingdom has also spent some of its foreign reserves, which fell from 2.75 trillion riyals at 2014-end to 1.90 trillion riyals in September 2018.
Although now less of a necessity, Saudi Arabia and other Gulf governments may issue more sukuk do so in order to support their fledgling Islamic capital markets.
“Bahrain, Oman and to a lesser extent Saudi (Arabia) are still facing deficit pressures,” said Howaladar. “But nonetheless, the pressure is less and so that borrowing urgency has diminished.”
Bank lending has always dominated the market, but the private sector is increasingly keen on diversifying its funding sources so as to not be as dependent on banks, he said. “Globally, Islamic banks are growing faster than their conventional counterparts, so whether you want to do a sukuk or Sharia-compliant financing the bank market is still open,” added Howaladar. “Bond and sukuk markets get more attention, but banks are still able to offer Sharia-compliant financing for their customers.”
UAE sukuk issuance has grown in 2018, rising to $6.4 billion as of Sept. 23, versus $3.3 billion in the prior-year period, according to S&P. The country’s markets regulator this year issued new sukuk regulations that have helped bolster supply, said Raffaele Bertoni, head of fixed income investment at Kuwait-based Gulf Investment Corporation, a supranational financial institution co-owned by the six nations of the GCC.
A large part of the UAE’s 2018 issuance is from real estate companies seeking to optimize their financing structure with a better mix of sukuk and bank debt ahead of Dubai hosting the multibillion-dollar Expo 2020, he said.
“Several new real estate projects are in the last phase of completion, and sukuk represents an efficient and more convenient financing structure compared to conventional bonds or even bank loans,” Bertoni added.
Corporations that prefer sukuk funding due to religious considerations will continue to issue Sharia-compliant debt despite the growing expense, said Sharjil Ahmed, a Dubai-based Islamic finance specialist and fintech strategist.
“But other issuers who opted for sukuk because of attractive pricing may shift to wherever they can obtain cheaper funding,” he said.
As well as tightening liquidity, a lack of standardised Sharia regulations and geopolitical concerns have slowed sukuk issuance in 2018.