Eurozone financial institution lending predicted to fall for first time since 2014

Eurozone banks are anticipated to chop lending subsequent yr for the primary time since 2014 as nations throughout the area fall into recession.

Banks will scale back their lending within the face of rising rates of interest and risky financial circumstances, making it more durable for cash-strapped corporations to borrow, in line with a report by consultancy EY.

Throughout the eurozone, lending by banks will fall by 1.8 per cent subsequent yr, EY predicts, after rising 4.6 per cent this yr.

The report additionally acknowledged rising power costs, rates of interest and inflation — mixed with falling actual family incomes — would result in a drop in demand for loans from shoppers.

“The area’s economies are dealing with recession, and a contraction in borrowing pushed by lowered demand and provide is forecast as shoppers, companies and banks change into extra cautious,” stated Omar Ali, associate at EY.

“The short-term financial affect will probably be felt universally, however small companies are more likely to battle most if entry to finance is constrained.”

Nonetheless, the consultancy predicted that lending within the eurozone would choose up after subsequent yr, rising 2.7 per cent in 2024 and three.7 per cent in 2025, assuming the struggle in Ukraine doesn’t escalate additional, inflation falls, power costs stabilise and confidence returns.

Lending to corporations is anticipated to drop 2.7 per cent subsequent yr, its weakest stage in a decade, as corporations grapple with increased borrowing prices, sluggish financial exercise, provide chain challenges and the rising price of capital items.

Shopper borrowing is predicted to fall 1.4 per cent in 2023 because the affect of inflation on incomes means shoppers are much less probably to purchase costly merchandise.

EY predicted banks can be hit with a 2.6 per cent rise in mortgage losses this yr — rising to five per cent in 2025 — as corporations and households battle to repay debt.

However the charges will probably be decrease than in earlier financial downturns as a result of banks tightened their lending standards after the monetary disaster. In 2013, mortgage losses within the eurozone peaked at 8.4 per cent.

Germany and Italy are the 2 economies anticipated to see the largest drop in lending subsequent yr — at 1.7 and 1.8 per cent, respectively — as they endure the financial penalties of upper power costs.

On the FT’s latest Banking Summit, UBS chair Colm Kelleher stated Brexit and the stalling of the EU’s banking union venture meant lending can be more likely to gradual considerably in a recession.

“I feel Europe goes to be comparatively sterile floor for the long run,” he stated.