Non-Bank Financing of European Non-Financial Firms Miguel Ferreira (Nova SBE) October 3, 2018

Transcription

1 Non-Bank Financing of European Non-Financial Firms Miguel Ferreira (Nova SBE) October 3, 218 Based on EFFAS (216) research report co-authored with Diogo Mendes and Joana Pereira

2 Agenda Banking Sector versus Capital Markets Banking Sector Outlook Capital Markets Outlook European Corporate Sector Outlook Future Trends Conclusion 2

3 Banking Sector versus Capital Markets Financial system in Europe differs greatly from that of the US, where a larger fraction of financing is done through capital markets. Companies in Europe are heavily dependent on the banking system, which imposes particular challenges to SME that face restrictions in accessing capital markets. SMEs represent 99% of all businesses in EU market and provide two-thirds of the total private sector employment. 3

4 % of GDP % of GDP % of GDP % of GDP Banking Sector versus Capital Markets Evolution of Private Credit by Deposit Money Banks Evolution of Syndicated Loan Issuance Volume Europe US Europe US Evolution of Corporate Bond Issuance Volume 5 Evolution of Stock Market Capitalization 16 4,5 4 3, ,5 2 1,5 1, Europe US Europe US 4

5 % of Domestic Bank Deposits % of Domestic Bank Deposits Banking Sector versus Capital Markets Evolution of External Loans and Deposits of Reporting Banks to the Non-banking Sector Evolution of External Loans and Deposits of Reporting Banks to the Banking Sector In Europe, liberalization of capital movements could promote an easier access to finance for SMEs facing domestic credit supply shortages. However, financial integration in Europe is still limited for non-financial companies, with exception of UK/Ireland. Cross-border flows declined during crises, flight to home. 5

6 Banking Sector versus Capital Markets Bank-lending is highly procyclical. This problem is more pronounced in countries where capital markets are less developed, such as in most European countries. Evidence shows that the economic costs of financial crises and subsequent economic recessions are larger in bank-oriented systems than in market-oriented systems (Gambacorta et al., 214; Pagano and Langfield, 214). Recent research finds evidence of substitution from bank loans to bonds during times of tight monetary policy and lending standards, high levels of nonperforming loans, and low bank equity prices (Becker and Ivashina, 214). Bank finance (+) Banks have superior monitoring capabilities compared to bond markets Capital market (+) Bond markets mitigate the excessive dominance of bank finance (-) Bank funding can be expensive and procyclical (+) Bonds substitute for banks during banking crises (-) Bank lending is more volatile than bond finance (-) Bond issues have high issuance costs 6

7 % of GDP Banking Sector Outlook Banking system in Europe is fragmented and includes a wide range of sizes, strategies and ownership structures. Since 1996 the EU banking system almost doubled in size, and the rise was mainly driven by the growth of the largest 2 banks. Evolution of Financial System Deposits While deposits have evolved smoothly in the last years even during the crises, banks balance sheet were largely affected by negative shocks in their security portfolios. 7

8 % % Banking Sector Outlook Banking concentration measured by the share of 5 largest banks in Europe (6% to 7%) is much higher than in US (35%). and UK/Ireland rank at the top of countries with higher banking competition (lower concentration and net interest margins). Eastern countries are the less efficient, presenting higher net interest margins, although this does not seem to be driven by higher concentration. Evolution of Bank Net Interest Margin Evolution of Bank Concentration

9 % of GDP % Banking Sector Outlook Crisis affected banks funding cost and profitability due to high default rates. 3 Evolution of Bank Nonperforming Loans to Gross Loans However, banks did not reduced credit to economy (with exception of Northern Europe, and UK/Ireland). As banks tightened lending standards they limited access to new loans but did not reduce existing ones (zombie lending). 25 Evolution of Private Credit by Deposit Money Banks,

10 Diffusion Index Diffusion Index Diffusion index Banking Sector Outlook As credit standards and collateral required for loans rose, demand for loans has decreased dramatically after Evolution of Credit Standards required by Eurozone Banks to firms by loan maturity Long-Term Short-Term Evolution of Collateral Requirements by Eurozone Banks Evolution of Demand for Loans by Eurozone firms 1

11 Capital Markets Outlook Over the years, European institutions have attempted to promote the access to capital markets. Capital Markets Union (CMU) is an ongoing long-term project (219) whose goal is to further deepen market-based finance in Europe. European Commission has set the priority for the development of a single rule book, a great step towards harmonization of the y framework. These initiatives aim to remove barriers to cross-border investment and free movement of capital. Fragmentation of market infrastructures seems to be one the main obstacles. Despite the differences, (large) firms in Europe have access to capital markets - bond markets and equity markets. 11

12 % of GDP Bond Markets Bonds, debentures, notes and commercial paper have particular importance in UK/Ireland, followed by. Bond markets are much less important in the remaining groups of countries, especially in Southern and an countries. 25 Evolution of Gross Portfolio Debt Liabilities

13 $US Millions % of GDP Bond Markets But bond market access is limited for non-financial firms bonds, Total bonds outstanding are less than 2% of the GDP for any region. Evolution of Total Bonds Outstanding (%GDP) But in Evolution of Total Amount Raised Through Non-Convertible Bonds (average per group)

14 Number of firms % of GDP Equity Markets Number of companies listed per 1 million people has been declining since 23. However, stock market capitalization has been stable throughout the period with exception of a peak in Evolution of Number of Companies Listed per 1 Million people Evolution of Stock Market Capitalization

15 $US Millions % Equity Markets There is heterogeneity among European regions in terms of volume of equity issued per year. Excluding the peak in 29, no group of countries presents a volume of equity issuance higher than 2.5% of GDP per year. Evolution of Volume of Equity issued per year ($US Millions) Evolution of Volume of Equity issued per year (% of GDP)

16 European Corporate Sector Outlook SMEs represent vast majority of firms in European corporate structure (i.e., number of firms, employment, gross value added). There is no evidence that these companies perform worse in terms of return on assets (ROA) and sales turnover. However, these companies suffer typically larger losses during economic downturns. SMEs are particularly dependent on bank financing and have limited access to other alternative sources of financing. This may impair the ability of SMEs to grow, as they are innovative, fast growing and present a high risk-return profile. While non-bank sources of financing are important for the whole corporate sector, they may be even more relevant for SMEs. 16

17 % % European Corporate Sector Outlook There is no evidence that SMEs perform worse in terms of profitability. Evolution of Return on Assets (Non-SMEs) Evolution of Return on Assets (SMEs)

18 % % European Corporate Sector Outlook SME suffer typically larger losses during economic downturns (as in the 28 crisis). These firms have faced severe shortfalls in cash flows, hampering their ability to meet existing financing obligations. Evolution of Turnover (Non-SMEs) Evolution of Turnover (SMEs)

19 % % European Corporate Sector Outlook With exception of UK/Ireland, SMEs are more levered than non-smes. Although differences in leverage ratios are not large, the dispersion of leverage ratios among regions is higher for SMEs. Evolution of Leverage Ratio (Non-SMEs) 9 Evolution of Leverage Ratio (SMEs)

20 % % European Corporate Sector Outlook In terms of debt maturity, SMEs have significantly less long-term liabilities. Evolution of Long-term Liabilities over total assets (Non-SMEs) Evolution of Long-term Liabilities over total assets (SMEs)

21 Future Trends Dominance of banking system as a source of financing impair the ability of firms, and in particular SMEs, to grow. Diversifying the sources of financing is thus essential to ensure sustainability and competitiveness. New forms of alternative financing are rapidly growing in Europe, such as business angels, crowdfunding, venture capital and private equity, are an essential part of the development of non-bank financing. Compared to US, these sources are however still underdeveloped. Alternative non-bank finance instruments for SMEs Low Risk/ Return Low Risk/ Return Medium Risk/ Return High Risk/ Return Asset-Based Finance Alternative Debt Hybrid Instruments Private Equity Trade Credit Corporate Bonds Subordinated Loans/Bonds Venture Capital Factoring Securitised Debt Convertible Bonds Business Angels Leasing Private Placements Bonds with Warrants Specialized Platforms for Public Listing of SMEs Crowdfunding (debt) Mezzanine Finance Crowdfunding (equity) 21

22 % of GDP Future Trends Venture Capital Venture capital is a subset of private equity typically used by firms in a startup stage, innovative and high growth high-tech businesses. Its presence is still very concentrated in a few countries, so it is not a broadly used instrument yet. Venture capital investments as a percentage of GDP (213),3,25,2,15,1,5 Total Later stage venture Seed/start-up/early stage 22

23 Conclusions 1. In Europe, bank lending has been the traditional source of financing, while in other countries like US non-bank finance has been in place for a long time. 2. Bank financing imposes challenges to non-financial firms, in particular to those that are still recovering from the crisis. 3. Several processes of deregulation of the banking sector allowed banks to diversify their activity. Traditional activities as lending to the private sector account today for only one third of banks total assets. 4. Economic downturn in Europe has produce difficulties for banks to finance themselves and therefore to extend loans to non-financial corporations. 5. Non-bank alternatives (bond markets, equity markets and shadow finance) of financing are a crucial element for long-term growth in Europe, as bank lending is costly, highly procyclical and volatile. 23

24 Conclusions 6. Despite the stable role of bond and equity markets between 23 and 215, firms turned to capital markets in 29, when banking system significantly cut lending. 7. After the crisis, companies returned massively to the banking system, which regained its position. Market financing still has high costs vs. bank financing. 8. Shadow banking (e.g. structured investment vehicles, hedge funds, non-bank institutions, and money market funds) is emerging in Europe. 9. Other sources such as business angels, crowdfunding, venture capital, and private equity are still underdeveloped in Europe. 1. Working capital management may also be a way to generate financing in the short term, such as trade credit, especially during crisis periods. 24

25 Barriers to Development of Non-Bank Financing There are four important market barriers that prevent the development of non-bank financing: Knowledge and awareness. Quality of business plans and investment projects. Information asymmetries and transparency. Regulatory framework. Removing these barriers is essential to build up a sustainable financial market where European firms, in particular SMEs, find opportunities to grow and to be competitive. 25

26 THANK YOU!