View from City Road: Little cheer for the banks on lending

The value of share issues by industrial and commercial companies has fallen steadily through the year, but is still running ahead of 1992 levels as the strength of the stock market allows companies to raise finance from the market and pay off short-term bank loans.

More than pounds 850m was raised from share issues by British companies during October, according to figures released yesterday by the Bank of England. Nearly pounds 12bn has been raised so far this year, compared with about pounds 5.5bn for 1992 as a whole.

The slowdown in share issues through the year shows that the market is steadily losing its appetite and that the number of companies in fit shape to make significant cash calls is shrinking. A similar picture emerges in fund- raising through bond issues, although lower interest rates have not triggered as dramatic a leap since last year as that seen in the equity markets.

But only larger companies are able to raise money from the markets. Minnows have instead used improved cash flow - in large part a result of lower interest rates - to repay bank debt to an unprecedented degree. Improved cash flow also helps explain why borrowing from banks is subdued and why demands from the capital markets have slackened through the year.

All these effects offer little cheer to the banks, with the latest figures from the Bank for International Settlements also suggesting that bank lending is declining significantly. This helps explain why bank margins remain under pressure, and have plummeted to as low as a third of a per cent for big borrowers. Over-enthusiastic competition between banks is becoming painful rather earlier in the cycle than usual.