Recent developments in lending to euro-area non-financial corporations

The aftermath of the financial and sovereign debt crisis saw a slump in bank lending to non-financial corporations in the euro area, a development which spurred the Eurosystem to respond with an array of non-standard monetary policy measures. The supply of credit began to level off in mid-2013, and it has improved perceptibly since the autumn of 2014. But what the aggregate data conceal is that lending patterns still differ quite substantially from one country to the next. The September edition of the Bundesbank's Monthly Report investigates this topic by outlining the recovery across multiple euro-area countries and exploring why credit growth patterns in the four major euro-area countries have remained persistently divergent to this very day.

What the four countries have in common is they are all at one point or another on the road to economic recovery and that their recuperation is now fuelling credit growth. Yet deeper analysis suggests that lending in Spain and possibly in Italy, too, has been weaker hitherto when measured in terms of historical regularities, while the supply of credit in Germany and France has been consistent with the patterns observed so far. There are two main reasons why such differences exist. First, the need for the non-financial private sector to reduce the debt overhangs which had accumulated in the pre-crisis era; second, the problems which the crisis had unleashed in the banking system.

While both factors contributed to the lacklustre credit dynamics seen in periphery countries in recent years, their influence is likely to be much less noticeable today. As a case in point, Spanish businesses have slashed their debt overhang since 2012, a process which has now been gaining additional traction from the robust upswing in the country's economic fortunes. What is more, the available indicators, taken as a whole, seem to suggest that negative bank-specific factors are now impacting much less substantially on lending activity in Italy and Spain. However, persistently high levels of non-performing loans are continuing to drag on earnings and capital adequacy levels across both countries' banking systems. Reducing these vulnerabilities is a matter which the banks themselves, and banking supervisors and fiscal policymakers, too, will need to address.

The performance of German credit institutions in 2014

The operating income of German banks again saw robust growth despite the fact that the low-interest-rate environment continued to persist in 2014. The favourable refinancing conditions and the real economic environment made a positive contribution in this respect. By contrast, the preparatory work in launching the EU's banking union and implementing new reporting requirements pushed costs up. In preparation for its role as the future direct supervisory authority for euro-area institutions classified as systemically important, the ECB carried out an extensive asset quality review of these banks' balance sheets as well as a stress test. The significant German institutions were found to meet the regulatory capital adequacy requirements.

On the whole, operating income rose moderately to €121.5 billion against the backdrop of declining total assets. Net interest income in particular – the most important component of operating earnings – saw significant growth. Greater maturity transformation, a marked increase in lending and a pronounced drop in funding costs played a major part in this. However, the scope for stabilising margins going forward will probably become increasingly limited given the very low level that interest expenditure has reached in the meantime. The fact that deposit rates are close to the zero lower bound leaves very little room for further interest rate cuts, not least in terms of business and competition policy. In particular, the persistently low costs of banks’ credit risk provisioning have proven to be a central pillar of their profitability. Annual profit rose substantially to €24.2 billion. The equity capital base was strengthened, too, driving the pre-tax return on equity up to 5.7%. A net profit (€1.8 billion) was recorded for the first time since 2007, mainly due to the release of reserves by several banks to compensate for the substantial losses brought forward.