Manufacturers yet to restore faith in UK banks

MANUFACTURERS are still struggling to reconcile relations with UK banks almost a decade on from the credit crunch.

The situation is prompting many firms to continue shunning the banks in favour of self-financing investments, EEF, the manufacturers’ organisation has said.

EEF said it was concerned the situation was leading to lower levels of manufacturing investment overall.

Its new report warns the situation presents a risk to growth that will likely be sharpened as the UK heads towards Brexit.

It adds that the Competition and Markets Authority’s final recommendations on the competition failures affecting retail banking services for SMEs, due out tomorrow, must pack enough of a punch to stop the rot.  
 
According to the report, 85% of manufacturers are confident of securing finance for a new business opportunity. But, while 35% say they are more likely to use external finance than they were two years ago, almost two-thirds (65%) disagree. At the same time, there has been a spike in cash holding, with 55% of firms saying they are now holding more cash on their balance sheets compared to pre-recession levels.  

The data shows that prior to the Brexit vote, manufacturers’ investment intentions were solid, but still over half of firms (53%) would postpone or cancel investment if they couldn’t fund it themselves.

The EEF said this suggested that attitudes towards bank lending had remained largely unchanged even though economic conditions had improved considerably and interest rates have been stuck at historic lows.  

Manufacturers’ unwillingness to leverage their business with bank debt or rely on products such as overdrafts for working capital is likely to deepen post-referendum, it added, while uncertainty over economic conditions will only add to the caution.
 
At the same time, concerns have also been raised about the banking sector’s liquidity and the decline in bank stock prices which could bring competition shortfalls back to the fore.

Supply-side issues, such as the absence of product diversity, minimal differences in price, little transparency and poor banking relationships have been deterring factors even for those manufacturers with an appetite for bank finance.

This lack of a diversified base for finance could lead to tighter credit conditions which will be detrimental for the real economy, adds the EEF report.

Another major concern underlined in the report is that manufacturers’ increased propensity to hold cash on their balance sheet leaves them particularly vulnerable in the event of negative interest rates, the possibility of which some banks have already flagged up.

It concludes manufacturers are still more likely to use traditional products with medium-term debt (64%), asset finance (56%) and overdrafts (50%) the most common types of finance they would consider.  

Lower costs (59%) and the ability to demonstrate manufacturing-specific expertise (53%) might encourage them to consider increasing their use of external finance. At the same time, 60% of manufacturers would consider switching banks if the process was easier.

Lee Hopley, chief economist at EEF, said a reluctance by manufacturers to rely on external finance was a persistent hangover from the credit crunch, where trust and confidence in the banks stalled and never quite recovered.

However, with the Brexit vote dampening investment intentions and adding to uncertainty, this pre-existing condition could now become further aggravated, posing a risk for growth.