Author: Bernhard Speyer (+49) 69 910-31735
February 21, 2013
The lending volumes to companies in Germany held up better than in the euro area as a whole for quite some time. In the final quarter of 2012, though, the German credit market as well was no longer able to decouple from the trend: true, lending volumes were still up on an annualised basis (0.9%) but they fell in a quarterly comparison (- 0.7%). This development is currently no reason for concern, however.
In the euro area as a whole, the outstanding volume of loans to non-financial companies has been falling for quite some time now; at an annual rate of -2.3%, it was particularly weak in December 2012. However, it has to be taken into consideration that the decline is exaggerated by the statistics as a result of non-performing loans in Spain being shifted to a "bad bank" (SAREB) set up especially for this purpose. In comparison to the euro area, growth of corporate lending in Germany had held up well for a long time.
This pattern was confirmed in principle in the final quarter of last year. However, the German market for corporate lending cannot decouple from the overall weak trend in Europe, either. True, in Q4, the volume of loans outstanding to domestic companies and the self-employed – adjusted for non-bank financial institutions – was up 0.9% on an annualised basis, but on a quarterly basis, volumes were down 0.7% – the first decline since Q3 2010.
Particularly striking was the renewed massive decline of loans outstanding to manufacturing by 2.1% qoq. The final quarter of 2012 was the fourth quarter in a row in which outstanding credits to manufacturing companies fell in a year-on-year comparison. In absolute terms, the volume of outstanding bank loans to manufacturing has meanwhile fallen back to the level of 2006! Regarding credits to the services sector as well, the shortly interrupted trend of all in all declining credit volumes continued.
It is remarkable that the weak development of credit volumes – unlike in former, comparable situations – this time does not go hand in hand with a debate on an alleged credit crunch. In fact, there would be no plausible reason for this. All available data suggest that the feeble growth of credit volumes reflects weak demand for credit. This is documented both by the Bank Lending Survey of the ECB and company surveys, such as that of the ifo Institute on the so-called “credit hurdle”. The share of companies reporting difficulties in accessing credit is on a historically low level.
Thus, the low credit growth is likely to mainly reflect the weak economic performance, especially the weak investment demand, and companies' sound financial situation. Many firms continue to strengthen their equity capital ratios and reduce the proportion of debt capital.
A business-cycle-driven credit cycle is also suggested by the fact that the volume development in the domestically oriented sectors shows a better performance than in the export-oriented sectors and that demand by smaller companies seems to be stronger. The latter aspect is underscored by the fact that the volume development of those groups of credit institutions which mainly serve this market segment was particularly expansive, counter to the general trend.
Furthermore, it is currently attractive especially for the large companies to refinance themselves directly via the capital market. Due to the high demand by investors and the in part still high refinancing costs of some banks, the conditions for corporate bonds especially for well-rated companies are in individual cases more favourable than bank loans; for this reason some companies have substituted bonds for loans.
Conclusion: The weak credit growth is no reason for concern from an economic point of view; on the contrary, the expected pick-up in economic activity in the course of 2013 will probably also push up credit demand. By contrast, the weak credit demand is reason for concern for the banks, whose earnings in a core business field following falling margins now risk to be curtailed by shrinking volumes as well.
Author: Bernhard Speyer (+49) 69 910-31735
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