Reverting to the personal touch Published: July 20 2008 23:13 | Last updated: July 20 2008 23:13

When loans were virtually commodities and cash was easy to come by, most financial services companies and their customers spent little time learning about one another.

Borrowers spread their business among many banks, playing them off one another for better rates, and many lenders were more interested in selling complicated structured products than lower-margin lending.

Fast forward a year, and relationship banking is back with a vengeance.

Now that liquidity is tight and regulators and investors want higher capital ratios, banks are having to be cautious about who they lend money to.

“Know your customer” is now an essential principle rather than an old-fashioned throwback, and plain vanilla loans have become hot commodities.

“Banks are retreating to the guys they know and there’s not a lot of new money being lent,” said David Currie, co-head of UK investment banking at Investec.

“We’ve had a few clients who have been able to work through it, but that’s generally where they have existing relationships.”

With many financial institutions focused on internal problems, those with cash available are using their basic lending business to reward loyal customers, strengthen ties to accounts with growth potential and cross-sell other products.

“We want to take advantage of market circumstances to strengthen our position with a customer who might be multi-banked,” said Alan Keir, group general manager of commercial banking at HSBC. “We want to know where we stand with you, Mr Customer. If we’re giving you scarce capital, what are you doing for us?”

Many banks are using the loan negotiation process to ask their clients for other business, such as cash management and hedging against foreign exchange risk.

“At the moment borrowers are very aware that there aren’t very many institutions out there willing to lend money, and banks are very aware that if [they] are going to lend you money, they want to do the other business,” said Malcolm Hitching, a partner in Herbert Smith’s acquisition finance group.

“It’s not necessarily always formal, in the documentation, but you certainly see informal understandings.”

Consultants Oliver Wyman did a survey of large corporate banking clients last year and found that 80 per cent cited lending as a factor in their selection for their derivatives broker, versus 60 per cent who cited pricing and execution. Oliver Wyman believes the share mentioning lending would be even higher if the survey were repeated now.

Banks that hope to build their other businesses need to target their lending at clients who might need ancillary products, analysts said. Corporations with overseas businesses, for example, and those that buy a lot of commodities will have more interest in hedging products than purely domestic firms.

“The key thing is to focus on the right relationships and work out which clients have more potential for the more profitable businesses,” said Serge Gwynne, a partner at Oliver Wyman. “If you don’t have the right product range and you aren’t disciplined, you can still lose.”

Many bank executives are also reluctant to push products that could harm their client relationships.

“You cannot cross-sell anything unless you are absolutely sure the client is getting a good service,” said Baldvin Valtysson, head of Landsbanki’s London branch. “It’s a long game.”

HSBC’s Mr Keir said that manner is all-important. “You’re not in relationship banking if the only way the relationship works is if you are hectoring or bullying companies.” Customer satisfaction surveys serve as an important benchmark for employee bonuses.

The tight loan market is also proving to be a boon for specialist lenders and banks with debt advisory services. In both cases, customers are now willing to pay more for access to cash, either for higher-margin speciality loans or for help in putting together loan packages.

“Small and medium-sized businesses are recognising the merits of banks who really understand their business,” said Stephen Hodges, chairman of Close Brothers bank. “The balance shifts back somewhat in our favour.”

Nick Soper, head of Investec’s debt advisory service, said: “Borrowers are having to work harder to raise their debt now and so we are seeing many conclude, ‘I need to know what’s happening right now with the banks so I want someone to sit beside me’ . . . We’re very happy to be very busy.”

Copyright The Financial Times Limited 2008