KfW Credit Market Outlook: New lending slips into negative territory

• Decline of 4.3% in the final quarter of 2020
• With low investment appetite and a stable liquidity situation, businesses have little demand for credit
• At the same time, banks continue to gradually tighten their lending policy

KfW Research has calculated that new lending by banks and savings banks to businesses and self-employed persons in Germany clearly slipped into negative territory in the final quarter of 2020. According to the current KfW Credit Market Outlook, it fell by -4.3% year on year. KfW Research expects the downward trend to continue over the first half of the year. New lending in the first quarter is likely to be down 8% year on year, in the second quarter -10%.

The main cause for the drop in new lending in the fourth quarter of 2020 was lack of demand. For one thing, businesses remain very reluctant to apply for investment finance owing to continuing high uncertainty. For another, the liquidity situation in the overall business community is quite stable despite the lockdown, reducing demand for credit.

“Unlike in the spring of 2020, there was no increased demand for credit in response to the restrictions mandated during the second coronavirus wave”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “This is probably mostly because its impact on the overall economy has been less severe.” To be sure, the lockdown ‘light’ imposed in autumn and its tightening from mid-December put renewed pressure on many businesses – mostly in those sectors that were directly affected by closures. Nevertheless, the fourth quarter did manage to close with positive economic growth of 0.3% on the previous quarter. “The combination of a relatively stable economic situation, financial support from the state and businesses’ ability to adapt their offerings and costs has enabled them to consolidate their financial position. The need for new loans to keep businesses running in the pandemic has fallen”, said Köhler-Geib.

The finding that the liquidity position has remained stable across the overall business sector masks the fact that the financial situation varies significantly from one sector and business to another – and that the coronavirus restrictions have affected them to varying degrees. The manufacturing sector, for example, remained unimpressed by the rising rates of infection and continued on a path of recovery in the final quarter, growing 6.7% on the previous quarter. That is consistent with the fact that manufacturers in particular paid down a sizeable portion of their bank debts, repaying more than EUR 10 billion net, while the hospitality sector borrowed more. “This is why state credit guarantees and financial assistance as well as the provision of favourable financing terms by the ECB remain important for sectors that have been hit hard by the pandemic”, emphasised the chief economist.

A look at the supply side shows that banks have been tightening their lending conditions in small steps since the beginning of the crisis, including in the past quarter. In terms of lending conditions, interest margins were raised to account for risk, and demands on collateral increased in particular. Although the level of lending conditions appears to be generally commensurate with the risk situation even as average interest costs remain unchanged at a low level, access to credit may become noticeably more difficult if the trend towards tighter lending criteria continues.

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