December 19, 2011
THE retreat of capital-starved European banks from Australia could spell serious trouble next year for small to medium-sized businesses, according to Wesfarmers chief executive Richard Goyder.
The Wesfarmers boss said the issue that worried him most about 2012 was a shortage of liquidity, as European lenders diverted scarce resources to their home markets and faced regulatory requirements to strengthen their wobbly balance sheets.
He said he was worried that the banks were taking liquidity out of the market, saying it was a "real issue" for smaller businesses.
Mr Goyder's gloomy assessment was echoed by National Australia Bank head of business banking Joseph Healy.
"This issue has the potential to be quite serious next year, depending on the extent of the European banks' withdrawal and the length of time that term funding markets remain effectively closed," Mr Healy said.
Under the Basel III global accord on bank capital, many eurozone banks have to lift their core tier-one capital ratios to 9 per cent by the middle of next year.
The estimated cost is E115 billion ($150bn), or 12 per cent of their current capital, according to Reserve Bank deputy governor Ric Battelino.
However, in volatile markets, and with many banks trading at around 0.4 times their book value, there is a reluctance to tap the markets, even if the funds were available. The banks are therefore achieving the higher capital ratio by reducing their assets.
"European banks have to comply with Basel III but they can't raise capital, so they are shrinking their balance sheets by selling debt here to local banks, taking liquidity out of the market," Mr Goyder said.
"It's not an issue for Wesfarmers because of our investment-grade rating, but it's a real issue for SMEs (small and medium-sized enterprises)."
France's biggest bank, BNP Paribas, is just one of a number of major European lenders that are winding back their exposure to Australia.
There are also concerns that trade finance is drying up.
BNP Paribas and French rival Credit Agricole -- two of the most active banks in such financing -- have been cutting back on the business.
Trade finance supports global trade through credit issued and guaranteed by banks to importers and exporters.
Locally, BNP Paribas, as reported in The Weekend Australian, has withdrawn from the $3.7bn syndicated loan for the Victorian desalination plant.
It has also cut short its $230 million participation in the $2.1bn financing for SevenWest Media, for which it had been one of the lead banks.
It is also a core lender to Wesfarmers, but Mr Goyder said the company continued to have a "fantastic" relationship with the bank. A BNP Paribas spokeswoman said last week that the lender remained committed to the Australian market.
However, like other global banks, it had to adapt to its needs and the changing regulatory environment.
"We continue to lend to our key clients, not only in the loan market but also in capital markets, foreign exchange and commodities," she said.
In similar circumstances in 2009, when Australia was faced with a withdrawal of foreign banks, NAB's then-retiring chief executive of Australia Ahmed Fahour, now head of Australia Post, was appointed chief executive of what was known as RuddBank.
RuddBank was designed to fill the lending breach vacated by offshore banks, particularly for creditworthy property projects.
In the end, however, the exodus was not as great as feared.
Mr Healy said he was not advocating the creation of another RuddBank. "But we shouldn't close our mind to that, particularly if there is a large-scale withdrawal and long-term problems accessing term funding," he said.
NAB, he said, was ready to assist customers affected by the withdrawal of offshore banks.
But its appetite depended on credit limits and exposure limits to particular industries.
"The first priority is our existing customer relationships," Mr Healy said. "But given the current climate, we are also being approached to come into the facilities of large European multinationals that we haven't banked before. They want to mitigate the risk by introducing a strong Australian bank."
Article by Richard Gluyas From:The Australian