Banks Now Declining Loan Applications More Frequently for Companies and Individuals

Loan Applications

Bank of Spain’s Report Highlights Tightened Financing Conditions Amid Rising Interest Rates

Amidst a climate of increasing interest rates, the Bank of Spain has drawn attention to the tightening financing conditions for the fourth consecutive quarter.

The vital flow of funds provided by banks to both individuals and companies, essential for sustaining economic activity, is encountering an increasingly unfavorable environment.

As per the Bank Loan Survey published on Wednesday by the Bank of Spain, “the proportion of rejected loan applications has risen across all categories.”

In essence, Spanish financial institutions are displaying a growing inclination to turn away those seeking capital for launching projects, rescuing businesses, as well as assisting individuals in acquiring homes or meeting their consumption needs.

The Supervisor Attributes First Quarter’s Loan Decline to Heightened Risk Perception and Reduced Tolerance by Banks

The supervisor, in his note, ascribes the decline observed in the first quarter to banks’ heightened risk perception and decreased tolerance.

Specifically, he cites concerns over the deteriorating macroeconomic outlook, borrower solvency, and rising financing costs.

While not delving into the specifics of these issues, the prevailing context is characterized by uncertainties. High inflation erodes savings, interest rate hikes amplify mortgage expenses and render them costlier for potential borrowers.

Moreover, ongoing turbulence in the banking sector, still lingering from the collapse of several regional entities in the United States and the Credit Suisse bailout, further impedes the confident flow of funds.

Contraction in Offer and Demand: Loans to Companies and Households Decrease

Not only is the supply of loans shrinking, but the demand for loans is also declining, encompassing both companies and households seeking financing for various purposes, including home purchases and consumption.

The text cautions that this drop in demand has been particularly significant in the case of home loans for families. The slowdown is gradually manifesting in the numbers.

According to the latest data from the National Statistics Institute, there was a 2% decrease in home mortgage signings in February compared to the same month last year, following a highly favorable 2022.

Unfortunately, conditions are not showing sufficient improvement, as evidenced by the average Euribor closing at 3.76% in April.

Credit Applications Decline Beyond Entities’ Expectations, Except for Consumption and Other Purposes

The decline in credit applications is surpassing the expectations of the entities themselves, except in the case of loans for consumption and other purposes, where the negative expectations expressed three months ago align with the current situation.

The causes vary depending on whether they pertain to private clients or companies. In the case of private clients, the Bank of Spain posits that diminished consumer confidence in the economic landscape plays a role.

On the other hand, companies are increasingly concerned about the rising interest payments associated with borrowing, as well as a decrease in the rate of investment.

Paradoxical Outcome: Spanish Banks Benefit from Credit Restrictions

Interestingly, Spanish banks have not faced severe repercussions from the credit restrictions. As per the supervisor, the interest rate hikes implemented by the European Central Bank have actually worked in their favor, resulting in increased profitability over the past six months, primarily due to higher net interest income.

In simpler terms, their profit margins are expanding as clients with variable loans are paying higher interest rates.

Bittersweet Outlook for the Second Quarter: Supply and Demand for Credit Expected to Decline Moderately

In the second quarter of the year, the outlook appears bittersweet. Financial institutions surveyed anticipate a further overall reduction in credit supply, albeit with a more moderate impact compared to the first quarter.

Additionally, there is an expectation of a decline in credit demand, but with less intensity than the decrease observed in the first three months of the year.

This trend is not limited to Spain alone. The European Central Bank (ECB) issued a warning on Tuesday, stating that the decline in credit demand from companies is the most significant since the global financial crisis.

The tightening of credit conditions has surpassed expectations, reflecting a broader phenomenon beyond national borders.