KfW Credit Market Outlook: Downward trend in business lending market has deepened

• Drop of 6.5% year on year in first quarter of 2021
• Coronavirus-induced base effect overstates drop by around one third
• Decline set to bottom out by summer

According to calculations by KfW Research, new lending by banks and savings banks to businesses and self-employed persons in Germany continued on its expected slide into negative territory in the first quarter of 2021, falling by 6.5% on the previous year. But this drop is overstated by the strong lending activity triggered by the coronavirus pandemic in the spring of 2020. Taking out additional bank loans was often the chosen response of businesses to mitigate the abrupt losses in turnover in the early phase of the pandemic and remain solvent. KfW Research estimates that roughly one third of the current rate of contraction of new lending is attributable to the base effect. It expects a 9% drop in new lending in the second quarter of 2021.

Fundamental factors, however, remain dominant for the weakness in the credit market. In the first quarter, only a small share of enterprises again reported being in loan negotiations with banks. For one thing, pandemic uncertainty continues to make businesses reluctant to invest. For another, pressure on enterprises from losses in turnover and short-term liquidity concerns is gradually easing. Not only is the economic situation improving for broad segments of the economy, the increasing disbursement of government support payments is also likely to have reduced the need for additional external finance.

There have recently been some bright spots on the supply side of the credit market. While banks tightened their lending policy gradually but steadily last year, that trend is weakening again slightly. At the same time, average interest costs for new financings clearly fell to a new low in March. It is safe to assume, however, that banks were temporarily more accommodating in response to the expiry of the benchmark period for the ECB's targeted longer-term refinancing operations on 31 March in order to meet the conditions for the particularly favourable ECB refinancing.

“I expect the variation in new lending to bottom out in summer before it starts to recover in autumn as the negative base effect vanishes and the economic rebound gains momentum”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. But there are downside risks. After the coronavirus crisis, businesses will have to shoulder more debt than before and, particularly with a view to the transformation towards a climate-neutral economy, there is uncertainty about the overall framework. That could weigh on demand for investment finance for some time to come.”

Note: KfW Research calculates the quarterly KfW Credit Market Outlook exclusively for the German business newspaper Handelsblatt.
The current edition is available at:
www.kfw.de/KfW-Group/KfW-Credit-Market-Outlook