The adage goes that lenders make a killing in times of recession or downturn.
If there is a grain of truth in the saying, specialist financiers could mop up from the current environment of rising interest rates and inflation.
Tony Ressler, the boss of one of the biggest private lenders in the world, New York Stock Exchange-listed Ares Management Corp, told Financial News in an interview in 2017 that rising interest rates would make floating-rate direct lending “more attractive”.
The former employee of troubled investment bank Drexel Burnham Lambert explained that 90% of the firm's direct lending was issued at a floating or non-fixed rate, meaning it could profit from a heady mix of rising interest rates and price increases.
The price of a floating interest-rate loan varies throughout the payback period, often tracking the benchmark rate of interest.
After a period of sustained low-interest rates since the financial crash of 2008, the Bank of England and European Central Bank have both raised interest rates to combat high inflation.
The ECB is expected to raise the rate of interest by at least 0.25% next month with a further increase in view in September, and the Bank of England is expected to raise the bank's base rate to 1.25% this week.
“It will bring difficulties, or at least slowdowns, in both the high-yield and fixed-rate markets as people lick some wounds because some people got a little too accustomed to very, very low interest rates,” Ressler said would be the case if interest rates rose from the extremely low rates of recent years.
Well, his prediction might just be coming true.
Shareholders are putting their money in banks that provide specialist financing such as mortgages, direct lending and mezzanine loans that blend debt with equity, with merchant bank Close Brothers Group PLC (LSE:CBG), ING, private capital provider Intermediate Capital Group (LSE:ICP) and specialist and mortgage lender Paragon Banking Group PLC (LSE:PAG) all tipped to benefit.
Shares in Paragon were up 8.3% on Tuesday, trading at 509p shortly after the release of its interim results. The banking group reported underlying profits that were “ahead of expectations” for the six months to 31 March, analysts at investment bank Goodbody said in a broker note on Tuesday.
Paragon revised its guidance upwards on loan growth for 2022 “on the back of the strong 1H22 outturn” and declared an interim dividend of 9.4p.
Investment bank Peel Hunt recommended its shares as a ‘Buy’, adding that “overall loan assets grew 8.6% to £13.9bn”.
Intermediate Capital meanwhile reported a record year in fiscal 2022. It posted pre-tax profit of £565.4mln for the recent period, up from £509.5mln the previous year.
Investment bank RBC Group has upgraded ING's shares, expecting its stock to outperform the market, it said in an analyst note today.
“Interest rate benefit coming through faster but also facing more headwinds: 40% of ING’s replication portfolio has a maturity of below 1 year which is a higher share than we expected,” RBC said in the broker note, forecasting a “gradually” improving return on equity for the lender.
“We forecast ING to return 48% of its market cap to shareholders out to 2025 (unchanged, in line with guidance) and our valuation gives credit for excess capital (EUR2ps)."
The broker also recommended Close Brothers' stock this week, saying its past performance meant it could be a good ‘defensive’ investment.
In an analyst note on Tuesday, RBC said the lender “justifies a higher valuation during times of stress due to the consistency of its earnings”, but warned it is “negatively geared to rising rates” and has “screened unattractively” compared to ‘interest-rate sensitive’ peers.
“Historically in recessionary environments, CBG's loan growth has accelerated,” RBC said. “We model loan growth of 7% & 8% in 2023/2024 (cons +6% in both years).”