Bank lending continues to decline

Bank lending to businesses and households continues to fall across most categories as the deleveraging process continues.

According to the latest Central Bank statistics, mortgages and household consumption lending were both down. However, deposits continue to rise.

During the boom years, Irish banks grew their balance sheets much quicker than their deposit books. Consequently their loan to deposit ratios ballooned to unsustainable levels. Over the past few years this has seen a huge run-down in loan books as they attempt to increase the size of their deposit books.

There are significant implications for the wider economy. The flow of credit to SMEs remains constrained.

The total amount of lending by domestic banks to the SME sector at the end of September was €72.5bn, a 0.9% drop on the previous quarter and a 2.7% decline on the year. Excluding the financial intermediation sector, the total amount of lending to the SME sector at the end of September was €59.8bn, which was down €518m on the previous quarter and down €2.5bn, or -4.1%, over the past year.

Loans to non-construction and non-financial companies fell by 4.9% in the 12 months to the end of September.

The Irish Banking Federation (IBF) blames the low levels of lending on the lack of demand as SMEs struggle with already high debt levels. The Central Bank has issued a number of reports this year which found that low levels of lending can be attributed to a reluctance by banks to extend credit and, even when loans are sanctioned, they have punitive interest rates.

The housing market continues to struggle as mortgage lending remains at historically low levels. Loans for house purchases were down 0.45 over the quarter and 1.9% over the year. That is the eleventh quarterly decline in mortgage lending in a row.

Standard variable rate, tracker rates and mortgages with a fixed rate up to one year made up 90% of the outstanding mortgages at the end of September. Tracker mortgages accounted for 49% of all mortgages issued by domestic banks.

Tracker mortgages are a source of huge problems for the bank as they generate a lower rate of return than the cost of funding. They are one of the main barriers to the sector’s return to profitability.

Personal lending stood at €17.6bn at the end of September, which was down 9.5% over the past year.


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