Business takes cautious approach to debt

There's been a minor flurry of reports recently about a revival in business lending, but as the financial aggregates for February showed on Thursday, intentions aren't yet translating to action. Companies are still holding more than $40 billion less debt than they were at the end of 2008.

There's been a minor flurry of reports recently about a revival in business lending, but as the financial aggregates for February showed on Thursday, intentions aren't yet translating to action. Companies are still holding more than $40 billion less debt than they were at the end of 2008.

The signs are, however, that chief executives, chief financial officers and company directors do now accept that the conditions that have prevailed since the global crisis in 2008 are not going to magically disappear.

They aren't borrowing in large numbers yet, but they are talking more actively to their banks about doing so.

What they have worked out is that their profits are being less powerfully driven by consumer and business demand that ahead of the crisis was basically dropping sales and earnings growth into their lap. To maintain their profit mojo, they need to at least defend their market share and preferably increase it, and invest in ways to make more money out of every dollar of sales - new technology, for example. Many of them also need to reinstate maintenance spending that has been deferred to prop profits during the post-crisis demand downturn.

It all requires investment at the front end, and there is no doubt that they can borrow to finance it: companies repaid debt pell-mell during and after the global crisis, and their borrowing capacity is the best it has been for 40 years, according to one big bank corporate lending boss.

Banking research group East & Partners reported last month that companies with sales of more than $20 million a year were now borrowing more than they were saving overall. It also said this week that business borrowing intentions were at the highest level since the global crisis, and the banks are reporting much the same thing. NAB's business banking boss Joseph Healy said this week that the bank's business clients were signalling a greater willingness to borrow and invest, and Westpac's business lending pipeline is the strongest it has been for five years, according to Alistair Welsh, the boss of Westpac's commercial banking operation that lends to companies with turnover of up to $150 million.

A rise in business lending activity would boost all of the banks if it happens, but NAB would catch the most wind because it is the biggest business lender, with a 24.5 per cent share of business loans and acceptances in January. CBA ranked second in that month with a share of 19.9 per cent, and ANZ and Westpac had shares of 16.1 per cent and 15.9 per cent respectively.

As economists have been pointing out, a lift in business spending is also needed to offset a coming drag on economic growth as resources sector investment begins to fall from record highs.

The problem of course is that intentions aren't yet converting to better loan volumes. The intentions measure that East & Partners runs in conjunction with Macquarie group is poll based, and the ones the banks run internally are a weighted blend of inquiries, interviews and applications. Both of them show that businesses are thinking about how and where to invest - but lending activity is still subdued.

According to the Reserve Bank, total business credit provided by the private sector actually decreased 0.2 per cent in February. It was up by only 2.3 per cent in a year, well below a 4.4 per cent rise in housing credit. Total business loans were also 5.4 per cent or about $42 billion lower than they were at the end of 2008, when business lending and the global crisis simultaneously peaked (companies were a bit slow to understand what was happening).

There are pockets of strength. Lending into the resources states is still strong, and new corporate lease financing is growing, possibly because companies are moving vehicles and other machinery off-balance sheet as part of the productivity push. Loan demand in the health and education sectors is also solid, Welsh says.

The banks are, however, not expecting a sharp increase in corporate loan demand this year, and the looming September federal election is a Grade A obstacle to certainty and decision-making. Telcos and the companies that serve are, for example, in suspense until they know the fate of the new national broadband network.

The bounce when it comes will also probably only lift business lending growth modestly. Healy thinks an annual rate of between 5 and 7 per cent is going to be sustainable, and that's in keeping with the new reality. As Reserve Bank governor Glenn Stevens remarked in June last year, current conditions do not support a return to the years ahead of the global crisis when debt-fuelled consumption was rising strongly and loan growth was averaging 15 per cent a year. Those were the unusual years, he said, and business strategies that assumed a resumption of them were sure to be disappointed.

Deputy governor Philip Lowe made a similar point in December, saying what was being called "cautious" consumer behaviour was more accurately described as normal behaviour. Consumption was rising broadly in line with income, he said, and that made sense.

Healy's prediction that "normalised" company lending growth will be in the mid-single digits is based on similar logic: loan growth in a normal, non-speculative market should be around 1 to two times the economic growth it is financing, not about five times stronger than economic growth, as it was in the run-up to the global crisis.

That still leaves a fair bit of room for business lending to accelerate and companies do appear to understand now that they are going to have to spend some money to make some money as demand grows slowly and the Australian dollar stays strong. The real question, though, is when they pull the trigger - and even given their good intentions, it will be surprising if lending growth accelerates before the federal election is held.

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