The Joint Stock Banks for 'Growth'
By NICHOLAS DAVENPORT
QUICK to take advantage of the freedom re- stored to them a year ago, when the credit squeeze was ended, the Joint Stock Banks have led the business recovery in this country. The spurt in their shares, incidentally, virtually started 'the Stock Exchange boom. Hardly was the ink dry on the decontrol order when the bank chairmen announced, one by one, that their companies had bought large blocks of shares in the leading hire-purchase finance companies— minority interests mainly, but in one or two cases a controlling interest was acquired. This was followed by a well-advertised extension of per- , sonal credits—loans repayable by instalments and without the pledging of collateral—which was made much of in the popular press and had great psychological value. (One or two of the banks held aloof from this campaign.) Finally, the Midland, which had taken the lead in offer- Mg personal loans more or less on the American system, seemed to make a bid for the 'cloth cap' customer by introducing a cut-price, limited ser- vice current account. It is doubtful whether that move will be very successful, seeing that most workers are content with the Post Office Savings Bank, which allows 2+ per cent.-on deposits, but as one of the bank chairmen put it : 'The bankers celebrated their release from bondage by a com- petitive display of fireworks which surprised the public and perhaps even their more sober selves.'
All this created the right atmosphere for a revival in business and personal spending. Cer- tainly, the rise in bank advances which followed has been phenomenal. In the twelve months to mid-July the total advances of the clearing banks rose to £2,676 million—an increase of £679 million or 33+ per cent.
Who has been taking these new advances from the banks? From the analysis given for the three months to May—the latest available—it seems that a little over 25 per cent, of the increase went to the 'personal and professional' borrowers who had suffered most by way of restriction during the squeeze. No separate figures are given for the new-style personal loans, but it is not believed that they amount to very much. It is significant that the combined advances of the two banks—Lloyds and National Provincial—which do not offer per- sonal instalment loans have actually risen slightly more than those of the other three. Another 25 per cent. of the total increase in bank advances can be attributed directly or indirectly to con- sumer credits. It is estimated that the banks financed at least one-third of the rise in hire- purchase debt by making loans to the hire-pur- chase finance companies and subscribing to new issues of their shares, and probably another third by making loans to retail traders or buying hire- purchase paper in the market. Probably about half the total increase in bank advances over the twelve months to mid-July went to finance the expansion of the consumer-goods trades. As everyone should know, the banks have to maintain a liquidity ratio of at least 30 per cent., and to avoid this ratio falling below that level when their advances were rising so rapidly they had to sell investments on a large scale. In the twelve months to mid-July they sold no less than £382+ million, of which a large part was taken up by the government departments. In the last two months of this period this selling dried up; in fact, in the last four weeks it amounted to only £5 million, and one bank even reported net purchases instead of sales. The effect of these sales of investments was, of course, to strengthen the liquidity ratio—to 32.7 per cent.—and to slow down the rise in net deposits. Lloyds Bank's seasonally-corrected index of net bank deposits showed a rise of £277 million to £6,645 million or 4.4 per cent. over the twelve months to mid- July. This rise of 4.4 per cent. reflected no more than the increase in the national product. No monetary inflation therefore followed on the extraordinary spurt in bank advances.
Clearly, bank shares as investments are now acquiring a new status. Previously they were almost money stocks tied up with the gilt-edged market: that is to say, they were attractive to buy when the gilt-edged market went up and un- attractive when it went down and involved the banks in heavy depreciation on their investment portfolios. Today bank shares have shed the look of a money stock and taken on the appearance of a 'growth' equity for two reasons. In the first place, the banks are tending to lend longer to industrial and commercial firms. There is no statistical proof of this, but I have personal know- ledge of not a few cases where the banks have told a business borrower that his overdraft will be renewed every six months for an indefinite period. I am not suggesting that British bankers will adopt the continental habit of 'investing' long in industry, but they are certainly moving away from the conventional limitation of their advances to very short-term loans. The Industrial and Commercial Finance Corporation', whose shareholders are the banks themselves, would not have felt obliged to go to the market to raise £5 million of new money if it had not been meet- ing with increasing competition from the banks in the financing of the smaller concerns. Bank profits from advances should therefore reflect in future the growth of British industry to a much closer extent than before.
In the second place, the banks' participation in the hire-purchase business is assuming great importance. Already they have spent £28 million in buying interests in hire-purchase finance companies. It is difficult to calculate the exact effect upon bank profits, because some banks have acquired only minority interests, but a firm of stockbrokers has recently made an estimate of the ratio of hire-purchase profits to total profits in the trading accounts of. the 'big five.' The National Provincial takes the lead with a ratio of 26 per cent. Outside the 'big five' the Com- mercial Bank of Scotland reported earnings for 1958 of which no less than 75 per cent. is esti- mated to have come from hire-purchase. There is no doubt that hire-purchase finance, after its recent harsh restraint, is entering a period of expansion much greater than any which it has previously enjoyed—and the banks will now par- ticipate in it to their shareholders' advantage.
There is no longer any need for bank share- holders to complain of their directors' meanness. Since the ending of the credit squeeze dividends have been increased, reserves have been capital- ised and distributed and 'rights' issues have been made on very favourable terms. In the past twelve months the banks have raised £30+ million of new money and capitalised £25 million of reserves. The £28 million they recently invested in the hire-purchase finance companies is already showing them a handsome capital appreciation. Bank sharesehave already risen in market values to return barely a 4 per cent. yield against the 5 per cent. or more return usual before the de- control. If I had to make a choice, I would perhaps favour National Provinciar and Bar- clays as the best 'growth' stocks among the 'big five,' but all should bring the investor an increas: ing return in income and capital values over the next few years—subject to no sudden political interference.
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