Euro area: bank lending continues to decline at a slower pace

M3 money supply in the euro area was weaker than expected as the growth rate was unchanged at 2.5% in October (consensus: 2.6%, Danske: 2.8%). Nevertheless, the rate of increase is still the highest since May 2013.

Growth in M1 money supply was unchanged at 6.2% in October. In real terms, where it is a good leading indicator for GDP growth, it was a bit weaker, but still suggests GDP growth close to 0.5% q/q in mid-2015.

Bank lending continued to improve in October and loans to the private sector (adjusted for sales and securitisation) declined 0.5% y/y from a decline of 0.6% y/y in September. In line with our expectations, this reflects that loans to households increased 0.6% y/y in October up from 0.5% y/y in November, while loans to non-financial corporations declined at a slower pace (-1.6% in October versus -1.8% in November).

These figures confirm that the slower pace of decline in lending to the private sector, which started after the ECB had taken its snapshot of the banks’ balances for use in the AQR in December 2013, continues.

The progress should continue after October, when the ECB’s asset quality review and stress test were released, as it revealed very limited capital shortfall as banks had raised capital in anticipation of the assessment. Hence, supply-side constraints on credit growth should be limited and it seems that it is up to the demand side to improve credit growth to the real economy.

The progress in bank lending reduces headwind to economic activity and this is one of the reasons why we expect the recovery to strengthen in 2015.

Today’s lending figures also provide additional information about the potential boost to liquidity from the ECB’s TLTROs. Given the observations for net lending in May- October, euro area banks are currently eligible for EUR165bn on the TLTROs from March 2015 to June 2016. Thus, it is higher than last month’s release, where it was EUR147bn. The potential take-up on the first allowance in March 2015 depends on accumulated net lending until January 2015; hence, the liquidity boost is still uncertain (we have six out of nine data points on a national level).

In mid-December, the second TLTRO will settle and our expectation is for a low take-up. In light of this, we believe it will be difficult for the ECB to expand the balance sheet sufficiently and we expect it to reach for more tools from the toolbox in early 2015.