Against the Odds: Improving Euro Area Commercial Lending Indicators

Against the Odds: Improving Euro Area Commercial Lending Indicators

Over the past several months the European Union has weathered a number of challenges – Brexit, political turmoil, the migrant crisis, and sluggish GDP growth among them. But surprisingly, the latest European Central Bank (ECB) data doesn’t reflect any negative shocks on credit supply and demand.

The latest Euro Area Bank Lending Survey found that competitive pressures are the main factor behind the easing of credit standards on loans to enterprises, including a narrowing of interest rate margins. At the same time, demand for loans by enterprises is increasing, driven by merger and acquisition activities, inventories and working capital, and continued low interest rates. Although demand is strengthening, alternative financing sources dampened demand for bank financing slightly.

Euro Area Bank Lending Survey

Looking at the top half of this chart, there is no question that banks ratcheted up credit standards like pricing, covenants, cash flow, and capital during Europe’s two recessionary periods. At the same time, businesses of all sizes stopped seeking credit. There is just no appetite for companies to take on additional liabilities during a period when consumers aren’t spending and the economy is shrinking.

More recently, in early 2014 both sides of the credit standards and demand equation crossed the middle point. Since then, credit standards have leveled off while credit demand from enterprises has risen slightly, especially for small-to-medium enterprises (SME).

Despite the ups and downs in credit demand and standards, loan outstandings to non-financial corporations has been surprisingly resilient, even during euro area recessionary periods.

ECB Loans to Non-Financial Corporations

The June ECB reflected slight growth over the past quarter, at the end of which the UK voted to leave the European Union. Time will tell whether Brexit and the expected negative impact to eurozone growth will dampen demand and subsequent loan growth for euro area commercial lending.

Patty Hines About Patty Hines

Patricia Hines, CTP, is a senior analyst with Celent’s Banking practice and is based in Charlotte, NC. Her areas of research include global transaction services and wholesale banking with a particular emphasis on treasury and cash management, corporate banking delivery channels, and trade and supply chain finance, along with commercial and small business lending.

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