US Corporates Emerge from Credit Crisis with Banking Relationships Intact

Relationships between the largest US companies and their banks remained relatively harmonious throughout the global credit crisis – at least when compared to the levels of acrimony that emerged between banks and cash-strapped small and mid-sized businesses. But the state of these relationships for the rest of 2010 will be determined in large part by the answer to a single question: as the economic recovery takes hold and big companies begin making long-delayed investments in their businesses, will their banks have the capacity and appetite to meet their increased demands for funding?

Research from Greenwich Associates reveals that turnover rates and customer dissatisfaction levels in banking relationships were much lower among the largest US companies than they were among mid-size companies and small businesses during worst moments of the credit crisis. The surprising stability of large corporate banking relationships throughout the crisis can be attributed to three primary factors:

• Demand for funding among large companies declined sharply with the onset of the recession and a slowdown in business.
• Even ailing banks made every effort to maintain good relationships with their largest corporate clients, which provide significant levels of fee-generating business from cash management to capital markets.
• Large companies that were dissatisfied with the lending policies or other services of their banks had few alternatives. Switching costs are often prohibitively high in these relationships – which frequently include highly integrated services like cash management – and even in the best of times, only a small number of universal banks have the broad capabilities and lending capacity required to meet the needs of these large companies. With many big banks under serious financial pressure themselves over the past 18 months, the list of replacement options for companies unhappy with their current banks was further reduced.

“In general, the largest companies in the US did not experience the same degree of disruptions in bank relationships and credit availability that plagued smaller companies during the crisis,” said Greenwich Associates consultant Don Raftery. “In fact, large US companies last year, on average, rated over 60% of their banking relationships as excellent or above average on their willingness to extend sufficient amounts of credit at acceptable terms, with about 30% of relationships rated as average and only slightly more than 10% describing their bank relationships as below average/poor in these terms.”

Crisis Tests Long-term Relationships

Although these findings seem to fly in the face of conventional wisdom about the effects of the credit crisis on US business, they are borne out by quality ratings that large companies gave to their banks last year. A look back to data from the first half of 2009 reveals that – even at the height of the crisis – large US companies gave relatively strong ratings to their strength of their relationships with their important banks. Among large clients of the top 10 corporate banks in the US, ratings of overall relationship quality actually improved from 2008 to 2009. Large companies rated their overall satisfaction level as below average or poor for less than 5% of their important banking relationships, while their level of satisfaction is excellent or above average with more than two-thirds of their banking relationships.

But the most telling statistic may be the fact that large companies rated more than three quarters of their bank relationships as excellent or above average on their commitment to a long-term, sustainable relationship. “Credit is the foundation of long-term relationships in corporate banking and our research shows that large companies were generally satisfied with their banks’ credit policies throughout the financial crisis,” said Greenwich Associates consultant John Colon. “But those views could change dramatically in coming months as an expected pick-up in demand for funding among these companies in a strengthening economy puts the recovering US banking industry to a new test.”

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