Frontpage News 2013 Companies get chea...

Companies get cheaper financing

26 September 2013

​New figures from Denmark’s Central Bank show that the interest margin has fallen half a percentage point over the past 15 months. The decrease is mainly caused by calm financial markets and fewer write-downs. 
The financial companies have since the financial crisis in 2008 experienced increasing pressure on the bottom line because of higher costs and lower revenues. With the crisis followed a higher credit risk facing businesses, which contributed to a growing interest margin.

"Following the crisis, the banks had to raise the interest margin, i.a. because the large write-downs put tremendous pressure on the bottom line, and bank lending and thus revenue base declined. In addition, the deposit rate was very low, so further reductions in interest rates could affect the banks' depositors to the same extent as in a more normal interest rate environment," explains the Danish Bankers Association’s Chief Economist, Niels Storm Stenbæk, having regard also to the increased regulatory requirements for banks and rising funding costs, which were caused by turmoil in the financial markets.

In April 2012, the companies’ interest margin peaked at 4 percent, but since then - with minor variations – it has been declining. Today, the companies’ interest margin is around 3.5 percent. 
Figure 1. The interest margin on the outstanding loans to non-financial companies 
Source: The Danish Central Bank's interest rate statistics.
Note: interest margin is calculated for the entire MFI sector and is an average of loan types and -maturities.
"A declining interest margin is good news for Danish companies, which of course also have been under pressure by economic trends. More calmness in the international capital markets also helps to draw interest margin down as many business loans are tied to money market rates," says the Chief Economist.

There is an upper limit to everything

The banks are still under pressure on earnings and new regulatory requirements. Therefore, there is no guarantee that the interest margin will continue to fall in the future.
"Times are certainly looking brighter, but banks are still struggling with earnings that are significantly lower than in many other industries. At the same time, banks should prepare themselves better in terms of more capital i.a. due to higher earnings," explains Niels Storm Stenbæk and continues:
"The banks are still working to minimise internal costs, but I find it hard to see that it will not also affect the interest margin. It has probably already caused that the companies' overall funding costs have not fallen even more."
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