Project Merlin: Banks miss small lending targets

23rd May 2011

Project Merlin, announced in February was a deal between the government and the five big banks: Barclays, Royal Bank of Scotland, Lloyds Banking Group, HSBC and Santander. As well as lending figures, it discussed issues such as bonuses.

The agreement included a commitment to lend £76bn to small and medium businesses (SMEs) during 2011. The banks also pledged to boost overall business lending to £190bn.

However, the Bank of England's first quarterly lending report shows that the banks fell £2.2bn short of the SME target in the first three months of the year. They lent about £16.8bn to SMEs between January and March, a shortfall of about 11% on the implied £19bn target.

The aggregate number submitted to the Bank of England for actual lending was £47.2bn, which meant that the banks missed the implied target of £47.5bn by less than 1%.

The British Banker's Association described the figures as "encouraging" and claimed "the available capacity was not fully taken up due to muted demand."

But Vicky Redwood, economist at Capital Economics, said businesses claim they are not asking for the loans because they do not think they will get them.

However, a commenter from Robert Peston's blog (BBC) would disagree with Vicky Redwood, in as much as "they are not asking for the loans because they do not think they will get them." CNB says: "I own and manage an SME and am involved in a local network of businesses. I, and most other SMEs in our network, are reigning in spending and investment whilst general UK spending remains indifferent. My Bank tells me it's 'open for business', but whilst I'm not investing, I'm not going to borrow. From a purely personal viewpoint, I can believe the Banks 'lack of demand' claim."

Business secretary Vince Cable said it was too early to judge the Merlin deal but warned banks to raise their game.

"There clearly is a problem, particularly for SMEs who can't go to capital markets. But it is still early days and I don't want to say Merlin is a failure," he said.

Kevin Murphy, fund manager within the Schroder Specialist Value UK Equity team and co-manager of the Schroder Recovery fund pointed out that the financial health of many of the banks remains strong.

For example: "The good bank within RBS is already generating 6p of profit as well as the potential for its underperforming businesses to improve and for the bad bank to melt away over time, which could deliver patient investors a very attractive investment return. Yes, as we acknowledged yesterday, the PPI issue is uncomfortable but it is a one-off and, in the final analysis, in our view should not be problematic to the centre.

That scenario is most accurately illustrated by the RBS core, which is currently generating the kind of profitability we think appropriate for the industry and which could drive a significantly higher share price as the bad elements within the business begin to disappear.

However, as the bad loans disappear and, as it were, the clouds part, the attractive levels of profitability the banks are currently earning could be revealed."

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