Aldermore, a young so-called "challenger bank" touted as an example of the kind of institution that will make up the financial sector's post-crisis model, will see its small and medium sized enterprise (SME) lending reach a billion pounds by the end of September, as its chief executive insists there is solid demand for finance among smaller businesses.
"We haven't spent a bean on marketing. We don't go out there and make fancy statements," said Phillip Monks, Aldermore chief executive, in an interview with IBTimes UK.
"The economics of building a bank as such are that we watch every single penny. We are like an SME in that respect. So to get a billion of lending to SMEs, which we will reach by the end of this month, is a great achievement and there has to be demand there."
Since taking over Ruffles, a small investment bank with £50m in assets focused mostly on slot machines, and converting it into Aldermore in 2009, Monks has turned the bank into a lender with a balance sheet worth over £2bn. It is still growing and a further billion can be expected over the coming year.
"Even though I am sure it's right that demand has dropped in the UK because of the recessional environment and SMEs are tending to hoard cash, the supply has dropped even further. There are a substantial amount of SMEs who are of good credit quality," said Monks.
This lack of supply is down to big banks with capital tied up in illiquid assets and because so many lenders have disappeared since the financial crisis.
"What we forget is the plethora of foreign banks who have left these shores to deploy their very scarce capital and liquidity back into Europe," he said.
"So we have got not Icelandic banks anymore, we've got no Irish banks lending in this country, just about every European bank that I know of has either downscaled, withdrawn, or is taking a rather schematic review of their UK lending.
"Then, of course, there was a whole raft of specialist finance houses, typically on the mortgage side but also in terms of asset finance. None of those businesses are lending."
Challenger banks and credit easing
Challenger banks, smaller institutions that could test the dominace of tradional high street lenders, were borne out of the breakdown of the huge money machines which were torn apart by the financial crisis and have won praise from all sides of the political spectrum.
Their relentless focus on providing a personal level of service to customers, as well as a responsible style of banking that differentiates them from the "casino" style corporates trying to launder soiled reputations, has won praise from across the political spectrum.
Labour leader Ed Miliband, who coined the "challenger bank" phrase, has called for a "banking revolution" where the bigger High Street lenders are broken down into small challenger banks to create a more competitive environment.
Vince Cable, the business secretary, cited Aldermore as an example of a challenger bank that could funnel funds from a new state investment institution to small businesses through lending.
"It was nice to be recognised by him," said Monks.
He believes the government is right to focus its attention on increasing the availability of credit for small businesses as a route out of the longest double-dip recession since World War Two and down the road to sustained economic recovery.
Chancellor George Osborne launched the National Loan Guarantee Scheme (NLGS) in March, whereby the government underwrites unsecured borrowing by banks.
This brings down the borrowing cost for the bank and the money saved is then, in theory, passed on to businesses in the form of lending at a lower interest rate.
A Treasury-backed Bank of England scheme called Funding for Lending (FLS) see banks offered cheap loans in direct correlation to the amount of credit they give to businesses and consumers.
As a bank increases its lending to these parts of the economy, so does the value of discounted loans it can access from the Bank of England.
"We have got to stimulate lending to the economy, there is no doubt about that," said Monks.
"It is very difficult to detract from the fact that the government needs to control its deficit, but on the other hand it has to stimulate growth.
"It can't really do that through, I think anyway, public works and the like because that just increases the debt mountain, so it's almost self-defeating.
"I think we need to try and stimulate the growth in the SME sector, which is a large driver of the UK economy."
Aldermore is close to becoming a fully-fledged participant in the FLS having had a formal invitation from the Bank of England. They are awaiting the final rubber stamp of approval.
"They have been very keen for us to join," Monks said.
However he does not anticipate a significant increase in the amount Aldermore lends out because of the scheme.
"We have got the capacity to lend, we have got the capital there. We are very careful about the rate at which we grow. At the end of the day, banking needs to be done prudently, so we don't envisage that we will just splash this money around," Monks said.
"What we will be doing, however, is targeting it very carefully. I do think you'll see areas where rates are cheaper.
"I think it will probably allow us to lend a little bit more, but I'm not going to call out that all of a sudden we have got loads and loads of money to go splashing around."
FLS is aimed at new lenders, he said, who were not capital constrained.
"What it doesn't do is make banks more capital efficient, and therefore if they're capital constrained in the first place, while they may have a cheaper cost of funding they won't be able to lend any more to customers," he said.
Bigger banks in the British financial sector are suffering from "balance sheet indigestion", according to Monks, as their cash is tied up in long-dated assets which are "clogging up their capital".
He cited residential mortgages as an example. Before the crisis these assets would have been securitised on the debt capital markets. Now this is not possible.
"What [the government] has to do is ease that balance sheet indigestion," Monks said, adding that this is something he knows the government is looking at as it works out the detail on how its state investment bank will function.
Relationship management and SMEs
Monks perceives a break down in the structure of a relationship between a lender and their SME clients.
Instead of a focus on maintaining and improving the relationship, many bank managers have their eyes set on sales targets. Each manager's client base represents too broad a type of business, too.
"I've been in banking now for longer than I care to remember, and for as long as I can remember SMEs have turned around to the banks and said you don't understand my business. And that's a feature of a number of things," he said.
"The quality of the relationship manager has been detuned in the large banks and it has taken on a more sales environment rather than a banking environment. The sales quotas have tended to dominate, so sales management has become more important I think than relationship management."
Then there are managers who do not understand the industries their borrowers earn their living in.
"It is very difficult for a relationship manager to be an expert if he is dealing with a chip shop one day and an aerospace company the following day," said Monks.
"It is very difficult for him to understand the nuances of those industries like we do, and what we increasingly do is develop skills in specific industries.
"Therefore we go to the customer, not only understanding their business from a P&L and cash point of view, but also the economics and the market conditions in which they are operating. We speak their language.
"It is something which larger corporates have benefitted form in the bigger banks, but that SMEs never have - and that's where it's really, really needed."
Aldermore also makes sure it keeps how it functions as a bank simple, cautious and driven by the borrower's needs.
"We are not taking adverse risk at all and the demand is undoubtedly there for a bank like us that has good service and is reliable," Monks said.
"It is a straight forward proposition. We don't do any investment banking or market trading. There's a dynamism that pervades right through the bank and we only focus on a few things in which we are experts.
"A small number of industries and a small number of product sets which satisfy the needs of SMEs."