RLPC-European banks sacrifice blue-chip loans to free capital

By Tessa Walsh

LONDON, March 17 (Reuters) - Banks are sacrificing relationships with European blue-chip corporate clients by selling on syndicated loans that they would usually hold, in order to free up and redeploy increasingly scarce capital.

Syndicated loans to Europe's most highly-rated companies have always been loss-leaders for more lucrative business for the investment banks, such as bond or equity issues.

But for banks, the relationship cost has never been higher and many are opting to sell, senior bankers said.

Loan pricing has been rising this year, but has failed to keep pace with the blow-out in investment-grade credit default swaps (CDS), which is re-emphasising the low yields on offer to lenders as capital grows increasingly scarce.

"The actions of central banks are not having an impact on easing the bank market. It's seemingly not trickling down and finding its way to the right places and there is an increasing reliance on loans in the absence of other capital markets," said Julian van Kan, head of loan syndications at BNP Paribas.

Companies are leaning on their relationship banks to make large commitments to syndicated loans at around 50 to 75 basis points, but investment grade CDS reached record wides of 166 basis points (bps) on Monday.

Increased funding costs are also hitting banks' returns. LIBOR and EURIBOR rates have been rising, but this does not reflect individual banks' costs in a market short of liquidity.

Most banks used to fund below LIBOR and earn interest margins on top, but some are now funding at 50 bps or more over above interbank rates, eating into already slim loan returns.