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Further Positive News in Lending Surveys

18 January 2017 by Eoin Walsh

As our regular readers will know, we always take a close look at both the Bank of England Credit Conditions Survey and the Euro Area Bank Lending Survey, as they give us a good insight into the lending environment in the regions; both were published recently, and by and large, pointed to healthy conditions for borrowers and lenders alike.

In the UK, the supply of secured credit to households was unchanged over the previous 3 months, while lending to the high Loan-to-Value (LTV greater than 75%) segment slightly declined, although both are expected to grow in Q1 2017. Lending in the unsecured space also increased, with unsecured personal lending criteria loosening, although credit scoring for credit card lending tightened. In the corporate space, availability was unchanged for all sized companies and to the commercial real estate sector.

On the demand side, demand for house purchase loans was marginally up, and is expected to be unchanged in Q1 2017, while demand within the Buy-to-Let sector was up significantly, but expected to decline in Q1 given the new BTL rules on the horizon. Demand for unsecured loans, including credit cards, increased in Q4, while in the corporate space, demand from SMEs fell significantly and are expected to decline again in Q1 2017, with medium-sized company demand expected to pick up. Demand from larger corporates was unchanged, after a significant fall in Q3, with reductions in capital investment and commercial real estate being the main factors behind this, although M&A activity did add to demand.

As regards pricing levels, the picture was mainly unchanged, but BTL spreads widened slightly, as did lending to large businesses, while unsecured personal lending, including credit cards, enjoyed a tightening.

The picture in defaults is a little more mixed, but overall encouraging, with default rates and loss-given-default rates both lower for secured lending to households. One area that could be concerning is credit card lending, where defaults have now increased for the past five quarters, however loss-given-default rates have actually improved for the last seven quarters, while borrower quality has also improved and criteria has been tightened. There was also a slight uptick in default rates for SMEs, but loss rates were stable overall.

To summarise, the UK continues to see both stable demand and availability of credit, with sensible criteria tightening in credit card lending. Demand from corporates has not fully rebounded yet, with Brexit likely to be the culprit behind the lower CapEx and commercial real estate demand, however both were stable in Q4. Overall, apart from perhaps an amber light for credit card defaults, green lights were reported for most parts of the survey.

In Europe, the picture was also positive, with loan growth supported by generally robust demand across all sectors – Enterprise, House Purchase and Consumer Credit.

However, one area did grab our attention; credit standards for loans to enterprises tightened slightly by 3% (ie. 3% of banks reported net tightening) across the eurozone but this was entirely driven by the Netherlands, which saw 34% of banks reporting a net tightening, following a zero reading for the previous 3 quarters. This tightening was due to lower bank risk tolerances regarding firm specific situations for SME borrowers. The only other major country to report a tightening in risk tolerance was Spain, with a 10% reading, similar to last quarter. Overall, competition pressure continued help ease the pressure from stricter risk tolerances, probably a reflection of the ECB policies, and only Italy saw a tightening due to cost of funds, which isn’t a surprise given the focus on the Italian banking system in Q4. Looking ahead, eurozone banks expected marginal net easing of credit standards on lending to enterprises.

As regards actual terms and conditions being applied to new loans to enterprises, the report showed further easing across the EZ, mainly due to lower margins on average quality loans, while margins on riskier loans remained stable; the only exception was Spain where margins increased. The rejection rate also continued to fall across the EZ, continuing a yearlong trend, while demand for loans continued to increase – with the general low interest rates available being quoted as the main driver.

As regards mortgage lending, credit standards were broadly unchanged, with only a lower risk tolerance in Spain having a tightening impact there. Overall terms and conditions also eased, due to margins being lower to ‘average’ borrowers, while mortgages to risker borrowers saw margins widen. Competition pressure was again the main driver of margin tightening for mortgage lending, similar to the Enterprise sector mentioned above, and this was also the case for general Consumer credit, which also saw conditions ease. The rejection rate for mortgages fell across the EZ, which only experienced an increase in rejections in Q2 during the year, while demand was also very strong, with 32% of banks reporting an increase – driven by low rates, the housing market prospects and consumer confidence. It was a similar story for consumer credit, where rejections also fell and demand increased – again driven by cheap credit and also an increase in demand for durable goods.

As mentioned above, ECB policy is having a very positive impact, with 37% of banks reporting they had participated in the third targeted long term refinancing operation (TLTRO), driven by the cheap financing, and they also reported that previous rounds of TLTRO continued to help the easing of terms and conditions.

The transmission mechanism, so often referenced by Mario Draghi, is obviously working and the cheap rates available to banks are being passed on to customers and driving demand. All we need to complete the circle is for these results to feed into higher growth and inflation… and to continue once the stimulus package is removed… but so far, so good.

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