Insight - Lend and spend.

(From Financial Director)

Byline: Jules Stewart.

"There is an element of truth in the assumption that corporates are borrowing more in a low interest rate environment," says Gordon Scott, an analyst at Fitch Ratings. "However, for the banks this does not automatically translate into a hit on the revenue line. There is a difference in funding cost and lending rate, and so far banks have been able to hold up their margins pretty well. In fact, you can argue that this is a more attractive time for the banks to be lending, as there is less pressure on asset quality." Low rates also cut both ways, as they reduce a bank's borrowing costs.

The issue for banks is where they obtain their spread of returns, regardless of interest rate movements.

One could argue that since unsecured lending brings the highest rate of return on capital, the banks should be collecting deposits and lend out on credit cards. But since the last recession, UK banks have learned that this involves massive risk implications. So the key lies in a proper diversification of risk, which brings areas such as corporate lending into the picture.

If HBOS, which has the leading share of retail savings among UK banks, is pulling in deposits at 10 basis points and lending out to a corporate at 50bp to 200bp over prime, this can be a reasonable business providing the bank has done a proper credit appraisal.

The banks are certainly not showing any signs of closing their balance sheets to corporate customers. Royal Bank of Scotland, the UK's biggest lender to the corporate sector with more than a 35% market share thanks to its acquisition of NatWest, looks to be poised for an upswing in this segment of the business. The bank's lending was up 15% in the first half of last year, but then slowed to 9% growth over the past 12 months. Now the group's chief executive, Fred Goodwin (pictured), has indicated that the time may be ripe for credit expansion in the corporate sector. "The foot is going back on the accelerator in corporate banking and we will probably put our foot down a little harder if the credit metrics allow it," he said recently.