RBS, Barclays Cut Lending as Treasury Pushes for More

By Andrew MacAskill and Jon Menon

Sept. 4 (Bloomberg) -- Royal Bank of Scotland Group Plc and Barclays Plc, two of Britain’s biggest banks, cut lending even after promising the government to give more credit to borrowers and help revive the economy.

RBS and Lloyds Banking Group Plc, the two biggest banks bailed out by the government, and Barclays Plc reduced lending globally by 165 billion pounds ($270 billion) in the first half, according to company filings. RBS and Barclays reduced loans by about 11 percent, the most among Europe’s largest banks.

RBS and Barclays are at risk of missing the government’s target to boost their U.K. net lending by 36 billion pounds this year. The two banks cut lending to U.K. homeowners and businesses by 9.5 billion pounds in the first half, the filings show. London-based Lloyds, which is 43 percent owned by the taxpayer, declined to disclose its net U.K. lending.

“This is a bearish sign for the economy,” said Jonathan Loynes, chief European economist at Capital Economics Ltd. in London. “For there to be economic growth, bank lending needs to rise. It is pretty clear that there are supply constraints.”

The Treasury has committed 1.4 trillion pounds to rescue the nation’s banking system through direct investments, asset insurance and loan underwriting amid the worst recession in 60 years. Banks may not be lending the extra cash as they seek to bolster capital, Bank of England Deputy Governor Charles Bean said last week. Consumers repaid debt at a record pace in July, according to the Bank of England.

Lending Shrinks

Global lending fell by an average of 5.4 percent at the five largest U.K. banks in the first half, five times more than at the 10 biggest banks in continental Europe, company reports show. RBS, which is 70 percent government-owned, shrunk its global loan book by 91 billion pounds, Barclays by 50 billion pounds, and Lloyds by about 24 billion pounds, the filings show.

Fiona MacRae, a spokeswoman for Edinburgh-based RBS, said the bank had planned to shrink its loan book after receiving a government bailout. London-based Barclays said the reduction in lending was due to a decline in cash held against derivative trades and a stronger pound. Lloyds spokeswoman Eve Speight said the bank was committed to lending to “creditworthy” borrowers.

In all, Europe’s 15 largest banks by market value cut lending to customers by 2.9 percent from a year earlier, the company filings show. Banks provide about 70 percent of corporate financing in Europe compared with about 20 percent in the U.S., where borrowers sell commercial paper and corporate bonds to fund the majority of investments, according to the European Central Bank.

Some Banks Expanding

ECB President Jean-Claude Trichet and politicians around the continent are warning that banks’ reluctance to boost lending risks prolonging the recession.

Stockholm-based Nordea Bank AB bolstered lending by 5 percent in the period, more than any of the European banks. London-based Standard Chartered Plc and Zurich-based Credit Suisse Group AG increased loans by 3.6 percent.

All banks that received government aid cut lending in the first half, company filings show. Lloyds, Britain’s biggest mortgage lender, reduced its loan book by 3.6 percent. Zurich- based UBS AG, which received a cash injection from the Swiss government last year, pared lending by 7.2 percent.

“The priority of the weak banks right now is rebuilding their balance sheets,” said Arturo de Frias, a banking analyst at Evolution Securities Ltd. in London. “They are increasing some new lending, but at the same time running down their books by cutting old loans.”

Easing Demand

Banks say the lending slowdown is largely the result of a drop in demand from borrowers, a consequence of the recession. U.K. consumers, the most indebted in Europe, are paying back mortgages and credit card debt as interest rates drop.

RBS said U.K. net lending, which takes customer repayments into account, fell by 3.2 billion pounds in the first six months. The bank agreed to increase annual net lending by 25 billion pounds in February as a condition for state support. David Gaffney, an RBS spokesman, said businesses are looking to reduce their debt levels rather than increase them.

RBS said today it won’t call $1.6 billion of subordinated bonds after regulators objected to using state aid to pay holders of the lender’s lowest-rated securities. The Financial Services Authority told RBS not to redeem four series of bonds early after the European Commission said banks shouldn’t use government cash to repay equity and subordinated debt.

Brown Under Pressure

Barclays reduced its outstanding loans in the U.K. by 6.3 billion pounds in the first half even as it made 17 billion of new loans to households and businesses, indicating the bank may struggle to meet its target to increase lending by 11 billion pounds this year. Barclays spokeswoman Gemma Abbott declined to comment on the figures.

A Treasury spokesman said RBS’s lending targets are legally binding and apply over the 12 months from March. Barclays, which didn’t receive a government bailout, isn’t legally bound to increase lending, he added.

The failure to get credit flowing increases the pressure on Prime Minister Gordon Brown, who nationalized banks, insured assets and is underwriting loans to spur lending. Politicians have repeatedly criticized banks for failing to boost credit after receiving government bailouts and guarantees.

“The banks are still not playing fair,” said John Wright, chairman of the London-based Federation of Small Businesses, which represents 215,000 entrepreneurs. “Small businesses are still having difficulty getting finance from banks, and those that are fortunate enough to get finance face higher interest payments.”

To contact the reporters on this story: Andrew MacAskill in London at amacaskill@bloomberg.net; Jon Menon at jmenon1@bloomberg.net