KfW Credit Market Outlook: slump in corporate loans persists

• New lending business with companies down 2.3% year-on-year in 4Q 2015
• Rate of decline slows slightly, but outlook remains gloomy
• Growth in commercial housing loans business

The volume of new lending business conducted by banks and savings banks with companies and the self-employed (excluding loans for housing construction and financial companies) - as estimated by KfW in its quarterly Credit Market Outlook - contracted once again in Q4 2015, namely by 2.3% in comparison to the same period in the previous year. Lending to companies by banks had already suffered a 3.3% year-on-year contraction in Q3 2015. Although this means that the pace of the decline in banks' new lending business with companies has slowed slightly, there are still no signs of a trend reversal. That would require a significant surge in demand, which is not on the cards. In fact, the decline in new lending is expected to gather momentum again in the first half of 2016 due to unfavourable underlying effects. For Q1 2016, KfW Research is forecasting a reduction of about 4% in comparison to the same period of the previous year, when the banks registered strong growth in the new lending business with companies and the self-employed.

The causes of the slump in corporate loans are both structural and related to recent events. Companies' ample supply of equity is limiting the underlying demand for credit, while falling sentiment indexes also indicate that worries over the state of the global economy have spread from the financial markets to the real economy. This is also likely to make companies less willing to invest, which will impact the market for corporate loans. This contrasts sharply with the situation in the market for housing loans (both to private individuals and to companies and the self-employed), which continues to thrive. This is a reflection of the robust state of the domestic economy, rising demand for housing and the search for profitable investments.

“The figures published recently by the ECB on lending by German banks were quite good. This is encouraging, but should not distract us from the fact that the lending market remains divided. Although the housing loans business in Germany and with companies in other euro-area countries is expanding, we expect new lending to domestic companies to remain weak outside the residential construction sector. Concerns regarding the state of the global economy and persistently high levels of uncertainty since the start of the year are also making companies less willing to invest while further reducing demand for loans, which was already low. This trend could certainly be reversed as the year progresses, but only if confidence in the global economy is restored. We have seen some initial signs that this is happening,” said Dr Jörg Zeuner, Chief Economist at KfW.

KfW Research calculates its Credit Market Outlook exclusively for the Handelsblatt newspaper. It can be accessed at: www.kfw.de/kreditmarktausblick.