Spanish banks face tough rivalry in small companies bet

Mon Apr 21, 2014 5:46am EDT
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By Sarah White and Jesus Aguado

MADRID (Reuters) - Across Spain, the message is hard to miss in office windows showcasing offers: banks want to lend to small companies again.

After gorging on property lending in the run-up to a financial crisis, banks are looking to revive high-margin loans to businesses as the economy emerges from a prolonged slump and bond-trading income slumps.

But intense competition among lenders only just pulling back from a turf war on deposit rates risks taking the shine off the turnaround, companies and analysts warn.

A fight to win over clients will likely squeeze the margins many hope to make from lending to small and medium-sized enterprises (SMEs), which are typically charged higher interest rates than larger, less risky businesses.

Hard-pressed small companies, meanwhile, might still miss out as banks, burned by borrowers defaulting during the crisis, remain selective.

"The big challenge will be that banks will be competing for the best SMEs, but we need to see lending to the rest of the economy in order for the banks to increase their recurrent revenues," said Rui Croca, analyst for European banks at ratings agency DBRS.

Getting the lending strategy right will be important to the recovery of the Spanish banking sector after a 2008 real estate market crash and a five-year downturn that gutted earnings and left some in need of state rescues.

Much of Europe has been gripped by a credit crunch. Banks have been cutting lending as they strengthen their capital, but they also blame weak demand.   Continued...

The logo of Spanish bank Santander is seen outside a building in Madrid October 27, 2011.REUTERS/Andrea Comas