Global Bank Disintermediation

Continues As Corporate Borrowing

Needs Outpace Banks' Capacity
Primary Credit Analysts:
Rodrigo Quintanilla, New York (1) 212-438-3090; rodrigo.quintanilla@standardandpoors.com
Bernard De Longevialle, New York (1) 212-438-0287; bernard.delongevialle@standardandpoors.com
Secondary Contacts:
Stefan Best, Frankfurt (49) 69-33-999-154; stefan.best@standardandpoors.com
Qiang Liao, PhD, Beijing (86) 10-6569-2915; qiang.liao@standardandpoors.com
Table Of Contents
The Funding Gap: Corporate Funding Needs Versus Bank Credit
Availability
Related Research
FINANCIAL
INSTITUTIONS
RESEARCH
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 11, 2014 1
1331455 | 300510290
Global Bank Disintermediation Continues As
Corporate Borrowing Needs Outpace Banks'
Capacity
With corporations around the world set to seek as much as $60 trillion in funding through 2018, and ongoing
regulatory reform restraining bank lending in many areas, Standard & Poor's Ratings Services expects the trend of
global financial disintermediation to continue in the next few years. Bank disintermediation occurs when corporations
obtain funding from sources other than banks, be it from nonbank lenders or by issuing bonds in the capital markets.
By the end of 2018, businesses worldwide likely will have more than $73 trillion of debt (loans and bonds) on their
balance sheets, and we estimate that banks may only provide roughly $38 trillion--or about half--of that amount.
We estimate that bank disintermediation will increase by 3.5% globally by 2018--that is, banks will intermediate only
52% of corporate debt, compared with 55% in 2013. This accounts for an additional $3.1 trillion gap between banks'
lending capacity and corporate debt funding needs, which will likely be filled by bond investors and other nonbank
lenders (see "Bond Markets Bankroll Corporate Balance Sheets," published June 11, 2014). However, the economy will
dictate how quickly this gap will materialize, and this figure could rise if GDP growth accelerates beyond our current
expectations or if corporates choose to tap nonbank sources for a higher portion of their funding requirements. Thus,
the amount of credit banks can provide to businesses and how much debt corporations will load onto their balance
sheets depend in large part on the outlook for economic growth.
Overview
We expect that bank disintermediation will grow 3.5% or nearly $3.1 trillion by 2018--that is, banks will
intermediate only 52% of corporate debt, compared with 55% in 2013.
Fast-growing economies such as China and Brazil, which still rely heavily on their banking systems for funding,
may experience more rapid disintermediation than mature financial markets unless they receive fresh capital
injections into their banking systems.
Although we expect a moderate increase in disintermediation in Europe amid sluggish corporate loan demand,
we expect wide variations within the continent. The U.K. could experience a steady increase in
disintermediation because of banks' reduced lending capacity and an increase in corporate financing needs.
In the U.S., bank disintermediation should continue at a moderate pace, building on long-existing trends.
However, banks' satisfactory earnings leave them the option to increase business lending depending on their
earnings-retention strategies and whether they see profitable lending opportunities.
Lower return on equity associated with a higher capital base will structurally constrain bank lending growth
capacity around the world, in our view. No banking system in developing economies seems able to retain
enough earnings to finance double-digit growth in lending volumes. Eurozone banks, in particular, stand out as
having the lowest structural capacity to grow their business lending volumes if the economic recovery picks
up.
While the trend is global, we expect wide regional variations in the pace of bank disintermediation over the next five
years due to differing regulations and economic realities (see table). We expect a steady increase in disintermediation
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 11, 2014 2
1331455 | 300510290
in fast-growing economies such as China, India, Indonesia, and Brazil unless there are fresh capital injections into their
banking systems. However, disintermediation will likely progress at a much slower pace in Europe, where the
economy remains sluggish and credit demand low. We believe the eurozone (European Economic and Monetary
Union) will likely experience the biggest constraints on bank lending--particularly in several countries in the periphery,
where economic growth is especially anemic. However, while disintermediation will continue, the pace will reflect the
lackluster economic outlook and the still-high debt overhang in parts of the eurozone that limit the demand for
business financing as well as the cost of funding in both the bank and nonbank markets. Larger creditworthy nonbanks
able to fund more cheaply in the markets than banks would certainly accelerate the pace of disintermediation. The
U.K. also could see a further pickup in disintermediation amid its more dynamic economic growth.
In the U.S., while banking disintermediation will likely continue on its well-established path, the trend will not be
driven by a lack of bank capacity to extend corporate loans, but by other factors such as competition from the shadow
banking sector, banks' risk appetite, profitability targets, and earning-retention strategies. Given that the U.S. has the
most heavily disintermediated financial services sector in the world, U.S. banks will continue to compete fiercely for
their share of business lending. Meanwhile, in a few outliers, such as Canada and Japan, we expect intermediation to
increase or stay flat because growth in banks' capacity is exceeding the projected rise in corporate financing needs.
Bank Disintermediation Trend
Bank intermediation
2013 (%)
Bank intermediation
projected 2018 (%)
Disintermediation
(%)
Value of disintermediation
(US$ bil.)
Asia Pacific
68 62 7 2,069
Australia 87 76 11 166
China 62 56 6 1,451
Hong Kong 96 88 7 67
India 65 53 13 237
Indonesia 91 79 12 47
Japan 85 86 (1) (73)
Korea 50 44 6 114
Malaysia 41 36 5 31
Singapore 91 87 4 12
Thailand 74 68 6 17
North America
27 25 2 599
U.S. 25 21 4 648
Canada 62 65 (3) (49)
Europe (eurozone
and U.K.)
59 57 2 248
Eurozone 62 60 2 178
U.K. 47 43 4 70
Latin America
84 78 6 87
Brazil 94 87 7 81
Mexico 49 47 2 6
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 11, 2014 3
1331455 | 300510290
Global Bank Disintermediation Continues As Corporate Borrowing Needs Outpace Banks' Capacity
Bank Disintermediation Trend (cont.)
Total
55 52 3.5 3,003
Note: Calculated as commercial and industrial loans and commercial real estate loans as a proportion of total corporate debt (loans and bonds).
Source: Financial Institutions Research.
Under our baseline scenario, total global corporate debt (loans and bonds) will grow at 1.2x the pace of GDP growth
over the next five years and capital constraints will limit bank lending in some countries. In this scenario, we believe
global bank disintermediation would increase at a brisk pace. In the short term, the banking disintermediation trend
will be compounded in the developed world by the fact that many banks will still be catching up to new higher
minimum regulatory capital requirements. Because loans aren't fungible from country to country, some countries may
suffer much more severe credit constraints than others. In this context, there will be some clear financial gaps that will
have to be filled by so-called financial deepening, or increased debt and equity issuance, with nontraditional lenders
taking up the mantle of corporate financing.
Chart 1
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 11, 2014 4
1331455 | 300510290
Global Bank Disintermediation Continues As Corporate Borrowing Needs Outpace Banks' Capacity
The Funding Gap: Corporate Funding Needs Versus Bank Credit Availability
A feedback loop exists between loan growth and economic growth: The disintermediation gap--between what banks
can provide in financing and what corporations need--will grow faster if GDP growth accelerates. Conversely, a
shortage of bank lending in a number of countries could weigh on economic growth.
There are significant differences between the lending growth capacities of banking systems in different countries,
mainly because of differences in earning generation capacity and existing capital constraints (see chart 2). Generally
speaking, higher capital bases translate into lower returns on equity and reduced capacity for banks to increase their
lending volumes organically. No banking system is currently in a position to finance a double-digit increase in its loan
volumes without impairing its capital base. This means, absent a regular capital injection, banking systems will be
structurally unable to cope with the double-digit growth in corporate financing needs that we expect in a number of
developing economies.
Europe stands out as the region that will experience the highest constraints on bank lending. Given the region's current
high reliance on banks for funding, the question becomes where the financing of the European economy will come
from. While improvements in regulatory capital ratios should allow European banks to reverse the ongoing multiyear
deleveraging trend within the next 18 months, weak internal capital generation will still weigh on lending capacity. We
estimate that countries in the eurozone's periphery will be able to expand their loan portfolios by less than 2% per year
in the coming five years. This figure, while marking clear progress after years of decline, nonetheless suggests
continued severe restriction on credit availability. Small and midsize companies are likely to continue to have more
difficulty accessing credit than their larger counterparts.
Overall, eurozone banks would be unable to maintain their share of financing if corporate financing needs accelerate
amid a better economy. If European firms' financing needs were to grow at the same pace as what we forecast for their
U.S. peers (or 5.7% versus the projected 3.5%), we estimate that European banks' modest lending growth capacity
would lead to a sharp increase in disintermediation within the eurozone (6% versus 2% in our baseline scenario). This
would add $1.2 trillion to the eurozone's bank lending gap by 2018. Conversely, given banks' low earning retention
capacity, any further change in capital target would have a parallel impact on banks' lending capacity. If banks'
common equity capital target ratio were to increase beyond our scenario of 11%, to 12% for example, this would
represent more than two years of earnings retention not available to fund lending growth.
The expected reduction of banks' role in the economy suggests that complementary financing alternatives for
businesses will become more and more important to allow effective capital allocation.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 11, 2014 5
1331455 | 300510290
Global Bank Disintermediation Continues As Corporate Borrowing Needs Outpace Banks' Capacity
Chart 2
Related Research
Bond Markets Bankroll Corporate Balance Sheets, June 11, 2014
Underwriting The Recovery: Growth In European Shadow Banking Is Unlikely To Offset Bank Deleveraging, Feb.
10, 2014
Underwriting The Recovery: European Securitization Could Fund More Lending, If The Regulatory Stance Softens,
Oct. 22, 2013
Underwriting The Recovery: Ongoing Bank Deleveraging Constrains Credit Availability Across Much Of Western
Europe, June 28, 2013
Underwriting The Recovery: Financing The Path Back To Growth In Europe, April 10, 2013
Underwriting The Recovery: Internal Financing And Financial Discipline Keep European Companies On An Even
Keel, April 10, 2013
The Credit Overhang: Bank Financing For Future Corporate Growth May Be At Risk, July 31, 2012
The Credit Overhang: Is A $46 Trillion Perfect Storm Brewing?, May 9, 2012
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 11, 2014 6
1331455 | 300510290
Global Bank Disintermediation Continues As Corporate Borrowing Needs Outpace Banks' Capacity
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P
reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites,
www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription) and www.spcapitaliq.com
(subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information
about our ratings fees is available at www.standardandpoors.com/usratingsfees.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective
activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established
policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain
regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P
Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any
damage alleged to have been suffered on account thereof.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and
not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase,
hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to
update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment
and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does
not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be
reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives.
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part
thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval
system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be
used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or
agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not
responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for
the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL
EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING
WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no
event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential
damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by
negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Copyright 2014 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 11, 2014 7
1331455 | 300510290