Bank disintermediation occurs when corporations obtain funding from sources other than banks. By 2018, businesses worldwide likely will have more than $73 trillion of debt (loans and bonds) banks will intermediate only 52% of corporate debt, compared with 55% in 2013.
Bank disintermediation occurs when corporations obtain funding from sources other than banks. By 2018, businesses worldwide likely will have more than $73 trillion of debt (loans and bonds) banks will intermediate only 52% of corporate debt, compared with 55% in 2013.
Bank disintermediation occurs when corporations obtain funding from sources other than banks. By 2018, businesses worldwide likely will have more than $73 trillion of debt (loans and bonds) banks will intermediate only 52% of corporate debt, compared with 55% in 2013.
Needs Outpace Banks' Capacity Primary Credit Analysts: Rodrigo Quintanilla, New York (1) 212-438-3090; rodrigo.quintanilla@standardandpoors.com Bernard De Longevialle, New York (1) 212-438-0287; bernard.delongevialle@standardandpoors.com Secondary Contacts: Stefan Best, Frankfurt (49) 69-33-999-154; stefan.best@standardandpoors.com Qiang Liao, PhD, Beijing (86) 10-6569-2915; qiang.liao@standardandpoors.com Table Of Contents The Funding Gap: Corporate Funding Needs Versus Bank Credit Availability Related Research FINANCIAL INSTITUTIONS RESEARCH WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 11, 2014 1 1331455 | 300510290 Global Bank Disintermediation Continues As Corporate Borrowing Needs Outpace Banks' Capacity With corporations around the world set to seek as much as $60 trillion in funding through 2018, and ongoing regulatory reform restraining bank lending in many areas, Standard & Poor's Ratings Services expects the trend of global financial disintermediation to continue in the next few years. Bank disintermediation occurs when corporations obtain funding from sources other than banks, be it from nonbank lenders or by issuing bonds in the capital markets. By the end of 2018, businesses worldwide likely will have more than $73 trillion of debt (loans and bonds) on their balance sheets, and we estimate that banks may only provide roughly $38 trillion--or about half--of that amount. We estimate that bank disintermediation will increase by 3.5% globally by 2018--that is, banks will intermediate only 52% of corporate debt, compared with 55% in 2013. This accounts for an additional $3.1 trillion gap between banks' lending capacity and corporate debt funding needs, which will likely be filled by bond investors and other nonbank lenders (see "Bond Markets Bankroll Corporate Balance Sheets," published June 11, 2014). However, the economy will dictate how quickly this gap will materialize, and this figure could rise if GDP growth accelerates beyond our current expectations or if corporates choose to tap nonbank sources for a higher portion of their funding requirements. Thus, the amount of credit banks can provide to businesses and how much debt corporations will load onto their balance sheets depend in large part on the outlook for economic growth. Overview We expect that bank disintermediation will grow 3.5% or nearly $3.1 trillion by 2018--that is, banks will intermediate only 52% of corporate debt, compared with 55% in 2013. Fast-growing economies such as China and Brazil, which still rely heavily on their banking systems for funding, may experience more rapid disintermediation than mature financial markets unless they receive fresh capital injections into their banking systems. Although we expect a moderate increase in disintermediation in Europe amid sluggish corporate loan demand, we expect wide variations within the continent. The U.K. could experience a steady increase in disintermediation because of banks' reduced lending capacity and an increase in corporate financing needs. In the U.S., bank disintermediation should continue at a moderate pace, building on long-existing trends. However, banks' satisfactory earnings leave them the option to increase business lending depending on their earnings-retention strategies and whether they see profitable lending opportunities. Lower return on equity associated with a higher capital base will structurally constrain bank lending growth capacity around the world, in our view. No banking system in developing economies seems able to retain enough earnings to finance double-digit growth in lending volumes. Eurozone banks, in particular, stand out as having the lowest structural capacity to grow their business lending volumes if the economic recovery picks up. While the trend is global, we expect wide regional variations in the pace of bank disintermediation over the next five years due to differing regulations and economic realities (see table). We expect a steady increase in disintermediation WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 11, 2014 2 1331455 | 300510290 in fast-growing economies such as China, India, Indonesia, and Brazil unless there are fresh capital injections into their banking systems. However, disintermediation will likely progress at a much slower pace in Europe, where the economy remains sluggish and credit demand low. We believe the eurozone (European Economic and Monetary Union) will likely experience the biggest constraints on bank lending--particularly in several countries in the periphery, where economic growth is especially anemic. However, while disintermediation will continue, the pace will reflect the lackluster economic outlook and the still-high debt overhang in parts of the eurozone that limit the demand for business financing as well as the cost of funding in both the bank and nonbank markets. Larger creditworthy nonbanks able to fund more cheaply in the markets than banks would certainly accelerate the pace of disintermediation. The U.K. also could see a further pickup in disintermediation amid its more dynamic economic growth. In the U.S., while banking disintermediation will likely continue on its well-established path, the trend will not be driven by a lack of bank capacity to extend corporate loans, but by other factors such as competition from the shadow banking sector, banks' risk appetite, profitability targets, and earning-retention strategies. Given that the U.S. has the most heavily disintermediated financial services sector in the world, U.S. banks will continue to compete fiercely for their share of business lending. Meanwhile, in a few outliers, such as Canada and Japan, we expect intermediation to increase or stay flat because growth in banks' capacity is exceeding the projected rise in corporate financing needs. Bank Disintermediation Trend Bank intermediation 2013 (%) Bank intermediation projected 2018 (%) Disintermediation (%) Value of disintermediation (US$ bil.) Asia Pacific 68 62 7 2,069 Australia 87 76 11 166 China 62 56 6 1,451 Hong Kong 96 88 7 67 India 65 53 13 237 Indonesia 91 79 12 47 Japan 85 86 (1) (73) Korea 50 44 6 114 Malaysia 41 36 5 31 Singapore 91 87 4 12 Thailand 74 68 6 17 North America 27 25 2 599 U.S. 25 21 4 648 Canada 62 65 (3) (49) Europe (eurozone and U.K.) 59 57 2 248 Eurozone 62 60 2 178 U.K. 47 43 4 70 Latin America 84 78 6 87 Brazil 94 87 7 81 Mexico 49 47 2 6 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 11, 2014 3 1331455 | 300510290 Global Bank Disintermediation Continues As Corporate Borrowing Needs Outpace Banks' Capacity Bank Disintermediation Trend (cont.) Total 55 52 3.5 3,003 Note: Calculated as commercial and industrial loans and commercial real estate loans as a proportion of total corporate debt (loans and bonds). Source: Financial Institutions Research. Under our baseline scenario, total global corporate debt (loans and bonds) will grow at 1.2x the pace of GDP growth over the next five years and capital constraints will limit bank lending in some countries. In this scenario, we believe global bank disintermediation would increase at a brisk pace. In the short term, the banking disintermediation trend will be compounded in the developed world by the fact that many banks will still be catching up to new higher minimum regulatory capital requirements. Because loans aren't fungible from country to country, some countries may suffer much more severe credit constraints than others. In this context, there will be some clear financial gaps that will have to be filled by so-called financial deepening, or increased debt and equity issuance, with nontraditional lenders taking up the mantle of corporate financing. Chart 1 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 11, 2014 4 1331455 | 300510290 Global Bank Disintermediation Continues As Corporate Borrowing Needs Outpace Banks' Capacity The Funding Gap: Corporate Funding Needs Versus Bank Credit Availability A feedback loop exists between loan growth and economic growth: The disintermediation gap--between what banks can provide in financing and what corporations need--will grow faster if GDP growth accelerates. Conversely, a shortage of bank lending in a number of countries could weigh on economic growth. There are significant differences between the lending growth capacities of banking systems in different countries, mainly because of differences in earning generation capacity and existing capital constraints (see chart 2). Generally speaking, higher capital bases translate into lower returns on equity and reduced capacity for banks to increase their lending volumes organically. No banking system is currently in a position to finance a double-digit increase in its loan volumes without impairing its capital base. This means, absent a regular capital injection, banking systems will be structurally unable to cope with the double-digit growth in corporate financing needs that we expect in a number of developing economies. Europe stands out as the region that will experience the highest constraints on bank lending. Given the region's current high reliance on banks for funding, the question becomes where the financing of the European economy will come from. While improvements in regulatory capital ratios should allow European banks to reverse the ongoing multiyear deleveraging trend within the next 18 months, weak internal capital generation will still weigh on lending capacity. We estimate that countries in the eurozone's periphery will be able to expand their loan portfolios by less than 2% per year in the coming five years. This figure, while marking clear progress after years of decline, nonetheless suggests continued severe restriction on credit availability. Small and midsize companies are likely to continue to have more difficulty accessing credit than their larger counterparts. Overall, eurozone banks would be unable to maintain their share of financing if corporate financing needs accelerate amid a better economy. If European firms' financing needs were to grow at the same pace as what we forecast for their U.S. peers (or 5.7% versus the projected 3.5%), we estimate that European banks' modest lending growth capacity would lead to a sharp increase in disintermediation within the eurozone (6% versus 2% in our baseline scenario). This would add $1.2 trillion to the eurozone's bank lending gap by 2018. Conversely, given banks' low earning retention capacity, any further change in capital target would have a parallel impact on banks' lending capacity. If banks' common equity capital target ratio were to increase beyond our scenario of 11%, to 12% for example, this would represent more than two years of earnings retention not available to fund lending growth. The expected reduction of banks' role in the economy suggests that complementary financing alternatives for businesses will become more and more important to allow effective capital allocation. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 11, 2014 5 1331455 | 300510290 Global Bank Disintermediation Continues As Corporate Borrowing Needs Outpace Banks' Capacity Chart 2 Related Research Bond Markets Bankroll Corporate Balance Sheets, June 11, 2014 Underwriting The Recovery: Growth In European Shadow Banking Is Unlikely To Offset Bank Deleveraging, Feb. 10, 2014 Underwriting The Recovery: European Securitization Could Fund More Lending, If The Regulatory Stance Softens, Oct. 22, 2013 Underwriting The Recovery: Ongoing Bank Deleveraging Constrains Credit Availability Across Much Of Western Europe, June 28, 2013 Underwriting The Recovery: Financing The Path Back To Growth In Europe, April 10, 2013 Underwriting The Recovery: Internal Financing And Financial Discipline Keep European Companies On An Even Keel, April 10, 2013 The Credit Overhang: Bank Financing For Future Corporate Growth May Be At Risk, July 31, 2012 The Credit Overhang: Is A $46 Trillion Perfect Storm Brewing?, May 9, 2012 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 11, 2014 6 1331455 | 300510290 Global Bank Disintermediation Continues As Corporate Borrowing Needs Outpace Banks' Capacity S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. 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