An ECB bank lending survey reveals a further net easing of credit standards in Q1 2015, which should facilitate higher loan growth, notes HSBC.

Fabio Balboni of HSBC in an April 14, 2015 research report titled: “ECB Bank Lending Survey (Q1)” notes that banks appear to be willing to pass on the lower cost of funding to customers.

Further easing in credit standards

According to the HSBC research report, the ECB bank lending survey highlights a further net easing of credit standards for firms in Q1 2015 (-9% from -5% in Q4 2014) and households (2% vs -4% in Q4). Moreover, credit standards also remain tighter than their historical average. Interestingly, the credit standards are still tighter than they were in Q2 2010 before the Eurozone crisis hit.

Easing credit standards credit standards

The HSBC report points out that the primary drivers in the net easing of credit standards were lower cost of funding and competition pressures. As can be deduced from the following graph, Italy witnessed the largest net easing for firms and households for house purchase (25%), with pressures from competition being particularly strong.

Largest easing in Italy credit standards

However, Balboni points out that across the eurozone, the easing in credit standards led to lower margins on average loans. The report notes while Italy reported higher margins on riskier loans, Spanish banks logged a higher incidence of lower margin on riskier loans for firms. The analyst notes the higher risk tolerance and lower rejection rates by Italian banks could help improve the monetary transmission channel that remains partly hampered.

Less positive picture on loan demand

Turning its focus to loan demand, the HSBC report notes demand from firms appears to be slowing. The report points out that while demand for home purchases has improved from the previous quarter (29% vs 24%), the demand for loans for fixed investment by firms weakened (-6%) after showing improvement in Q1 2015 (11%):

Demand for investment purposes credit standards

The report expresses concern over the fall in demand for fixed investment in France and Germany. There was a weakening in demand for fixed investment in Germany (-16% vs 13% in Q414) and France (-19% vs 23% in Q4 14), with Spain being the sole exception to see an increase in demand for fixed investment by firms (10%, the same as in Q4 14):

Drop in demand in France and Germany credit standards

The HSBC report emphasizes that the lower demand for loans for fixed investment is a source of concern, as more investment is needed to sustain the Eurozone recovery beyond the current consumption boom driven by lower oil prices.

QE lowers banks’ funding costs

Highlighting the positive impact of QE, the HSBC report notes that so far QE appears to be effective in lowering banks funding costs and helping banks transfer risk off their balance sheets, particularly in Germany and Spain. The report points out that banks intend to use the additional liquidity from QE mainly to substitute maturing debt and to trim their reliance on ECB liquidity.

Balboni also notes banks appear to the willing to pass on the benefits to customers which should further stimulate loan growth. However, 18% of banks in net terms anticipate QE will have negative impact on profitability, particularly due to the reduction in net interest margins. Moreover, the report expresses concern about bank profitability over the medium term once the positive capital gains realized by selling their sovereign bonds to the ECB are exhausted.