European loan growth cools as banks tighten lending standards

Loans and deposits in Europe increased at a slower pace in the year to June 30, as growing inflationary pressures and the rising cost of living prompted banks to tighten access to credit.

Total loans at French monetary financial institutions, or MFIs, rose 3.6% year over year to €7.29 trillion, while those at German MFIs grew 6.4% to €6.51 trillion, according to European Central Bank data compiled by S&P Global Market Intelligence. This compares to increases of 9.3% and 9.7%, respectively, a year earlier. MFIs include mostly commercial banks, but also central banks, money market funds and other deposit-taking institutions.

Banks in the eurozone tightened their lending standards in the second quarter and expect to continue doing so as risk tolerance declines amid the current economic outlook, the ECB said in its latest bank lending survey.

Eurozone banks indicated a "considerable" further tightening of their credit standards for loans to firms, a "strong" tightening of standards for housing loans and a "moderate" tightening for consumer credit in the three months to June-end, according to the ECB survey of 153 banks.

* Access ECB data on French MFI loans. * Click here to access more ECB data on German MFI loans.

While banks are poised to reap net interest income gains from the end of ultra-low or negative rates, this could be partially offset by potential loan losses, which may increase as consumers and businesses feel the burden of soaring inflation and the impact of the Russia-Ukraine war just as the economy is starting to recover from the fallout of the COVID-19 pandemic.

Demand for loans to enterprises continued to increase in the second quarter, driven by firms' need for working capital, which the ECB said is likely related to increased energy and commodity prices amid continued supply chain disruptions. Demand for housing loans declined, mainly driven by lower consumer confidence and the general level of interest rates. Banks expect a large net decrease in demand for housing loans in the third quarter, the ECB said.

Total loans at MFIs in the Nordics also grew at a slower pace in the year to June-end, and those in Italy declined to €2.56 trillion from €2.59 trillion a year ago. Benelux and Spanish MFIs registered a slightly bigger increase in loan growth than a year ago.

Deposit growth was also at a slower rate, ECB data showed. Banks expect their access to retail funds to decline, given that long-term deposits are expected to deteriorate in the third quarter. Access to short-term deposits is expected to remain unchanged.

Loan-to-deposit ratios dropped year over year for most of Europe's largest banks, including Nordea Bank Abp, Svenska Handelsbanken AB (publ), HSBC Holdings PLC, Standard Chartered PLC, NatWest Group PLC and Lloyds Banking Group PLC.

French banks Groupe BPCE, Crédit Agricole Group and BNP Paribas SA as well as Germany's Deutsche Bank AG saw their ratios increase.