Banks increase exposure to private credit
Banks are increasingly funding private credit, with most of their lending going to the sector’s largest managers, Moody’s research has found.
Banks’ exposure to the sector grew by 18 per cent annually, on average, from 2021 to 2023, reaching $525bn (£401.1bn) in loan commitments by the end of 2023.
While this exposure only equates to 3.8 per cent of banks’ total loans, Moody’s noted that banks’ funding of private credit is growing at a pace that surpasses their other lending activities.
By contrast, banks’ overall lending grew by just six per cent annually between 2021 and 2023.
Read more: Marathon AM and Webster Bank form private credit joint venture
“Sector and risk are concentrated, with a few of the largest private credit managers accounting for significant parts of the asset class pool,” the report said. “Banks’ generally prudent risk appetite means they will normally lend to large, well-established private credit managers. Correspondingly, banks on average lend to just 20 private credit clients.”
However, Moody’s also noted that certain smaller banks “are pursuing aggressive expansion that could raise credit risks”, especially if they have less established track records and risk management processes.
“Larger banks typically have more established relationships with highly sophisticated investors like private credit market participants as well as more robust infrastructure to control the associated risks,” the report said. “Furthermore, larger banks may have relationships with private credit participants across several facets of their operations, providing a more complete view of their counterparties’ activities and exposures.”
The report found that banks’ private credit exposure is mainly in asset-based lending (ABL) and subscription credit facilities. ABL facilities make up around $350bn of total commitments, while subscription lines account for around $115bn.
Partnerships between banks and private credit fund managers are increasingly common. Last month, Apollo and Citigroup unveiled a $25bn direct lending partnership, designed to “significantly enhance access for corporate and sponsor clients to the private lending capital pool, at a scale and size which can provide funding certainty in strategic transactions”.
But regulators have warned that bank/private credit tie-ups could lead to unforeseen shocks in the market.
