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Banks ready to supply loans, but some SMEs just don't need them

By John Simpson

Published 26/05/2015

Seven Northern Ireland firms are finalists in the British Private Equity & Venture Capital Association Management Team Awards in association with Grant Thornton
Seven Northern Ireland firms are finalists in the British Private Equity & Venture Capital Association Management Team Awards in association with Grant Thornton

The commercial banks operating in Northern Ireland are a critical influence on the development of businesses. A number of different factors are influencing how this is evolving. First, an important influence is the way in which negative equity in property companies is changing. This is a small sector in terms of the number of active businesses, but in terms of scale and consequences, is casting a wider shadow over business behaviour.

Property businesses, whose legacy of debt has been removed from bank balance sheets and passed to other internal or external lenders, face new (sometimes difficult) challenges as new lenders exert pressure to realise their profits by accelerating the repayment of inherited loans.

Some borrowers are facing much tougher loan renewal conditions that are more demanding than they might have expected from the banks.

The serious knock-on questions in the property market co-exist alongside the changing market for shorter-term loans from the full range of commercial lenders.

There is new evidence that adequate working capital finance for businesses is available and the occasional complaints of shortages of funding are hard to justify. Backing up that conclusion is the quoted evidence by some of the commercial banks, particularly Danske Bank and Ulster Bank. Indeed, Ulster Bank recently referred to £1.5bn being available.

These claims seem to be consistent with the statistical evidence on bank lending in Northern Ireland as published by the British Bankers Association (BBA). In a comparison of bank activity in Northern Ireland between the fourth quarter of 2013 and the same quarter of 2014, bank lending has fallen sharply by almost £3bn, or 12%. For the business community, the change is even more marked. Lending to businesses (as opposed to households) has fallen by 17% to £13.8bn.

The BBA does not offer any explanation of the fall, but in a general covering note adds that the change may be a result of larger businesses repaying borrowing, the use of alternative finance products, or debt being written off or sold.

Since this fall in bank lending is recorded in a period when the economy was experiencing a degree of economic recovery, there may be a large element of debt write off or debt sales in the total. Property company adjustments may be distorting the totals. Unfortunately, the BBA does not offer that level of detail.

Taking only SMEs (small and medium sized enterprises), there was new approved lending in Northern Ireland in the fourth quarter of 2013 of £360m. It has varied in subsequent quarters, but in the fourth quarter of 2014 it was £387m; an increase of more than 7%. These SME figures add further weight to the possible conclusion that the negative BBA figures have been heavily influenced by a series of loan reductions affecting large local businesses, including property-owning groups.

These lending details are further corroborated by the outcome of a recent special survey reported by the Economic Advisory Group (EAG) and conducted in conjunction with IntertradeIreland. The EAG report on access by SMEs to finance offers some unexpected findings.

First, the number of SMEs not relying on any source of external finance has been increasing and in late 2014 was the reported position of 49% of these businesses.

Second, of the SMEs, only 4% were seeking additional loan finance in late 2014, down from 7% a year earlier. Most of the loans being sought were relatively small in value - 60% of the SME loan applications were for £50,000 or less.

However, over half of all loan applications in 2014 have been subject to loan application fees (35%) and facility and other fees were added to another 17%.

The general thrust of the recent EAG report is that availability of loan finance for SMEs is currently not a serious problem. The banks are ready with the supply, however, the demand is not high enough. Complaints are now harder to understand.

Company Report: Norbrook Holdings

Norbrook Holdings is the English-registered parent company for the veterinary pharmaceutical group of companies, including Norbrook Laboratories, based in Newry.

The holding company consolidates the performance of 22 companies, eight registered in the UK, two in the Republic of Ireland and 12 others around the globe.

Tragically, founder and former chairman, Lord Ballyedmond, died in an accident in March 2014. Sir Roy McNulty has been elected as his successor.

The group has had a history of year-on-year increases in turnover, which more than doubled in seven years to 2013. In the most recent year to August 2014, turnover fell slightly. 

This is partly attributed to adverse exchange rate movements. The company suggests it has confidence in continuing long-term growth due to a broader product range, customer loyalty and industry-leading product quality and availability.

In 2014, operating profits fell a little to £21.9m. Whilst total operating profits were lower, as a proportion of turnover, the profit margin also fell a little.  

Pre-tax profits in the most recent year rose to a new high level of £22.2m, partly because the annual interest payments on borrowed funds were much lower in that year at £0.6m.

 Spending on research and development continued at a high level in 2014, costing £11.3m, compared to £13.7m in 2013.

Capital spending on additional fixed assets, which was unusually high in 2013 at £16.3m, fell last year to £4.7m. 

Employment averaged 2.045 people in 2012. This was 135 more people than a year earlier. 

Post-tax profits were retained in the business and added to the value of shareholders’ funds, at August 1, 2014, estimated to be £123m: nearly £14m higher than a year earlier.

Belfast Telegraph

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