Shares in the big four banks are good value at the moment, and things will get tougher for SME's when it comes to raising debt. These are my two predictions for this year as a consequence of the global credit crunch, and that awful train wreck masquerading as a stock market at present.
Before I go on, let me say that I am in no way qualified to be giving investment advice, and that is not the purpose of this post (insert disclaimer here!).
OK, first the banks. The credit crunch came about because for years now too much money has been chasing two few investment opportunities. Non-banks brought competition levels to extremes, driving interest rates lower. All the lending opportunities that were good credit risks were being accommodated quickly and cheaply, forcing lenders to chase lower and lower credit risk deals for lower and lower returns. For example "no doc" loans came to be priced as cheaply as "full doc loans". Huh??? And so on for small business lending and corporate finance.
Then along came the credit crunch, and the non-banks started thinning out as their ability to raise funds diminished in the restrictive environment. This should mean that the banks (who are less reliant on capital markets for their funding sources) are able to write better quality loans at better margins, given the absence of throat cutting competition from the non-banks. Hence my view that they represent value in the share market train wreck.
When it comes to small businesses, the banks will be less compelled to write loans at cheap rates for businesses with riskier credit profiles - they will have the ability to become "choosy" - a position they enjoyed fifteen years ago before the proliferation of non-bank mortgage lenders we saw recently.
Credit challenged businesses will not be able to rely on banks should they wish to borrow their way out of trouble, as they have done in recent years. Interesting times are ahead of us I believe, and the papers are now beginning to talk about a pending boom in insolvency.
Small business advisors should be ensuring that on one hand their clients retain well cultivated relationship with their principle bankers, whilst at the same time making sure that they are not reliant on the one bank. If their current bankers will stand by them in the turbulent times that lie ahead, great. But small businesses should be keeping their options open!
So what should be good for the banks in 2008 - softer competition, will not necessarily be good for SME's.
What do you think?
The Cash Flow Ninjas
