Irish business loan demand expected to fall

Wed, Apr 25, 2012, 01:00

Banks expect to stop making it harder overall for companies to borrow in the coming months, the European Central Bank said today in its first lending survey to account for the full weight of the €1 trillion it has pumped out to support the sector.

The ECB’s quarterly Bank Lending Survey said only a net 2 per cent of the euro zone banks that took part expect to tighten the criteria firms must meet to borrow in the second quarter of this year.

But the survey also showed demand for loans by both firms and households fell considerably in the first three months of the year, although banks expect corporate loan demand to rise in the second quarter.

Ireland’s Central Bank said credit standards would remain unchanged in the second quarter, while company loan demand would fall further. In the first quarter of the year, loan demand contracted as enterprises had lower financing needs with spending on investment, inventories and working capital falling.

Banks also cited mergers and acquisitions as a reason for the fall in loan demand, and said there was a further tightening of credit standards in mortgage lending over the same period.

The ECB survey, which was conducted between March 23rd and April 5th, is the first to fully take into account the €1 trillion the ECB injected into the banking system in two tranches in December and February, and will ease the worst fears of an impending credit crunch.

"Today's BLS shows that the worst phase of the crisis for the euro zone banking sector may be over, and confirms that the ECB's bold unconventional measures significantly reduced the risk of a credit crunch," Unicredit economist Marco Valli said in a note to investors.

But analysts also noted the survey was carried out during a lull in tensions in the euro sovereign debt crisis.

"The survey came at a time when things looked slightly better than now," ING economist Carsten Brzeski said, referring to renewed debt strains especially in Spain.

In signs of reduced anxiety about lending, the ECB said a net 9 per cent of banks had tightened lending rules to firms in the first quarter of the year compared with the net 35 per cent that tightened in the fourth quarter of last year.

A net 7 per cent of participating banks expect firms' demand for loans to rise in the second quarter, compared with the 30 per cent that reported weaker demand in the past 3 months.

Demand for mortgages, however, is expected to continue falling, with a net 12 per cent of banks seeing less demand for home loans in the April to June period.

Banks also said their access to retail and wholesale funding had improved in the wake of the ECB's cash injections.

Additional reporting: Reuters