“Tacking into the wind”

EA banks battle against the headwinds

The key chart

The cost of borrowing for EA households (HH) and corporates (NFC) ended 2019 at, or close to, historic lows (%, nominal terms)
Source: ECB; Haver; CMMP analysis

Gusting force 9-10

The latest ECB bank interest rate statistics for the euro area (EA) show rates on household (HH) and corporate (NFC) lending at, or close to, new lows at the end of 2019.

In the HH sector, rates fell the most in 2019 (absolute bp terms) in Germany, Italy and the Netherlands, although France and Portugal also saw noticeable declines despite starting the year with rates well below the EA average. In the NFC sector, rates fell the most in Portugal, Spain, France and Italy but rose in Ireland, the Netherlands and Austria. Spreads (versus 3m Euribor) also hit new lows in the HH sector and were close to lows in the NFC sector.

Negative rate and spread developments are offsetting subdued loan growth and present an on-going challenge in terms of delivering sustainable top-line revenue growth. As noted in “Power to the borrowers“, QE has shifted the balance of power firmly from lenders to borrowers.

With the exception of the Spanish, Portuguese and Irish HH sectors, rates on new loans are also below rates on the outstanding stock of loans, indicating that downward pressures will continue.

Strong margin/spread headwinds remain for EA banks, compounding negative trends in the basic macro building blocks that are required to support sustained improvements in profitability and share price performance.

For more details, please contact me at chris@cmmacroperspectives.com.

The charts that matter

In real terms, the cost of borrowing remains low but above the 2018 lows of negative real borrowing costs. The ECB has been successful in achieving its goal to “ensure that HHs and NFCs should be able to borrow more and spend less to repay their debts” (%, real terms)
Source: ECB; Haver; CMMP analysis
In the HH sector, rates fell the most in Germany, Italy and the Netherlands during 2019 (YoY change in basis points).
Source: ECB; Haver; CMMP analysis
France and Portugal also saw noticeable declines in HH lending rates despite starting 2019 with rates well below the EA average
Source: ECB; Haver, CMMP analysis
In the NFC sector, rates fell the most in Portugal, Spain, France and Italy but rose in Austria (slightly), the Netherlands and Ireland (YoY change in basis points)
Source: ECB; Haver; CMMP analysis
Average HH spreads on new loans hit a new post-GFC low (versus 3m Euribor)
Source: ECB; Haver; CMMP analysis
Shifting the balance of power to HHs – lending rates have fallen further than 3m Euribor and the MRR since May 2014 in all economies except Ireland. The biggest falls have been in Portugal, France, Italy and Belgium (change in bp since May 2014)
Source: ECB; Haver; CMMP analysis
Shifting the power to NFCs – most pronounced shifts in NFC lending rates seen in Portugal, Spain, Italy, France and Germany (change in bp since May 2014).
Source: ECB; Haver; CMMP analysis
Exceptions to the rule – rates on new Spanish HH loans are above the rates on the outstanding stock. Along with the Irish and Portuguese HH sectors, this is an outlier – elsewhere in the EA, rates on new loans are below the rates on the outstanding stock (%, nominal terms)
Source: ECB; Haver; CMMP analysis
Where are we now? Lending rates in Germany and France, the two economies driving growth in PSC in the EA, remain well below average (%, nominal terms)
Source: ECB; Haver; CMMP analysis

Please note that the summary comments above are extracts from more detailed analysis that is available separately.