Investment remains a weak spot while Eurozone bank lending picks up - ING

Teunis Brosens, Senior Economist at ING, suggests that while low rates result in increasing demand for bank loans, most of it is fuelling housing markets but few loans result in additional business investment.

Key Quotes

“The slow but steady strengthening of the Eurozone economy is reflected in bank lending activity. According to the ECB’s Bank Lending Survey, banks saw a further increase in household mortgage demand in 4Q, with a net 36% of banks reporting higher demand (up from 23% in 3Q). Low rates, together with improving housing market prospoects, are the main driver. Mortgage demand was particularly strong in Italy and the Netherlands.”

“A sustainable recovery should not only depend on the housing market, but also on business activity. Here the survey data is more mixed. A mere net 16% of banks reported increasing business loan demand in 4Q. For now, business loan demand is failing to pick up steam. What is more, it is disappointing to see that only a net 2% of banks reported that business loan demand was strengthening as more investment was being planned. Taking advantage of low rates as well as financing M&A activity are much more important drivers for increasing demand.”

“On the ECB's uinconventional monetary policies, the bank lending survey shows that 60% of banks participated in the June 2016 round of TLTRO-II financing (when almost €400bn was borrowed, mostly replacing funding under the earlier TLTRO-I programme). Most funding needs appear to have been satisfied in June: only 37% of banks participated in the December 2016 round and just 26% of banks plan to participate in the upcoming March TLTRO-II.”

“For the majority of participating banks, the profitability of the scheme was the main motive to participate. Banks that did not participate cited a lack of funding problems and the cost of holding liquidity given the ECB’s negative deposit rate. The programme appears quite effective at realising its goal of increasing lending to the economy: 52% of banks say they use TLTRO-funding to lend to businesses, while 8% say they lend funds to households. The main other use of TLTRO-II-funding is the replacement of other sources of funding.”

“With unconventional monetary policies having their desired effects, and an extension of QE already announced until December, it is hard to think of a reason for Draghi to announce any change at Thursday's ECB governing council meeting.”