As Spain’s smaller regional banks have been hollowed out by bad real estate loans and the banking system has shrunk, state support has been an urgently needed prop for the country’s small and medium-sized enterprises. State-guaranteed development bank Instituto de Crédito Oficial (ICO), which for years was a source of long-term loans for larger Spanish companies’ investment projects, doubled its assets from €53 billion at the end of 2008 to €103 billion at the end of the third quarter of 2013.
It now stands as the source of roughly 11% of new lending to Spanish SMEs with maturity longer than one year. Before the crisis, it provided just 3.5% of their funding.
"In the first phase of the crisis, when stress was concentrated in the banking system, a huge funding gap opened up for the banks which ICO was partly able to fill, acting counter-cyclically," Fernando Naverrete, chief financial officer of ICO, tells Euromoney. "Even when the crisis became, in its second phase, more a sovereign debt one and the cost of financing narrowed between the banks and the state, ICO, with its diverse investor base, remained a vital source of funding at highly competitive cost for SMEs. And we have been expanding ICO as a means of bringing cheap financing into Spanish SMEs from other institutions such as the EIB, KfW, Council of Europe Bank and Corporación Andina de Fomento."
At the end of November last year, the European Investment Bank granted ICO a €1 billion loan that aims to ease access to bank funding for SMEs with up to 250 employees and, to a lesser extent, mid-cap companies with up to 3,000 employees. This is the largest loan the EIB has ever granted to a financial institution in the European Union to fund investments made by SMEs. The EIB granted around €9 billion for projects in Spain last year, of which approximately half has been allocated to finance investment by Spanish SMEs, almost doubling the support provided to this sector in 2012.
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| Markus Schmidtchen, first vice-president, special finance, financial institutions, at KfW |
German development bank KfW also provided funding to ICO last year. Markus Schmidtchen, first vice-president, special finance, financial institutions, at KfW, tells Euromoney: "All around Europe, countries that don’t already have promotional banks like KfW are now looking at them. However, a key drawback is the cost of funding of state-backed promotional banks, which might be more than 200bp higher than for KfW, and thus limits the benefit they can pass on to SMEs. We cannot solve this problem, but the German government started an initiative to help economies in the periphery if they fulfil certain conditions. We have a long-standing relationship with ICO and provided a €800 million loan last year, on behalf of the German government, to support SMEs in Spain."
While there has been much discussion of how to encourage capital markets investors to fill the funding gap left by retreating bank lenders that cannot support SMEs to the extent they used to, it is worth noting how public development banks work within the financing infrastructure already in place. ICO is highly efficient. A staff of roughly 300 manages its large balance sheet. Distribution of loans is entirely through the branches of the country’s banks, which all have direct links through their IT systems to ICO’s credit lines.
What impact is the enhanced provision of state-subsidized loans having for SMEs in Spain? "It is important to distinguish between what is happening to the stock of SME credit, which is still declining and probably will carry on declining for many years to come and the flow of new credit to SMEs, which is what’s really important for the economy," Naverrete says. "It was worrying that the system was providing lower volumes of new loans to SMEs each year from 2008 through 2012, but in 2013 there were signs of new loans to SMEs ticking up."
Central bank statistics track the supply of new corporate loans of under €1 million and of maturity of over one year. On the eve of the financial system crisis in 2007, banks were ladling these out at a rate of €33 billion a month on a seasonally adjusted basis. At the start of last year, that had sunk to €10.5 billion a month, but by the end of the year it had picked up above €11.5 billion a month. "There’s a sign of a positive credit impulse," says Naverrete. "Disbursements from ICO stood at €500 million a month last February, but by the end of 2013 were running at €1.5 billion a month."
And ICO is trying other ways to support SMEs as confidence in the country revives among foreign investors. The only way that deleveraging can be compatible with growth is if SMEs reduce debt through recapitalization and raise equity through retained earnings or from outside investors. ICO is acting as anchor investor in a series of venture capital funds designed to bring foreign capital and management expertise to Spanish SMEs.
