Yesterday, the ECB released the results of its latest Bank Lending Survey (BLS) which was conducted between 9^th and 24^th June 2015. While recognising the caveats common to all qualitative surveys, I am routinely checking the results of this quarterly release to get a feel on the prospects of European credit growth. I am particularly concerned with the delayed and subdued recovery in loans to non-financial corporates and I have repeatedly argued that a revival in this area is instrumental for a sustainable recovery.

Looking at the recent survey, the trend is for sure the one we should be hoping for but the improvements remain to slow, particularly if one considers the damage that was done over the previous years.

To be more specific, the ECB disclosed that over Q2 2015, 91% of the banks kept the credit standards for enterprises unchanged while 3% tightened them and 7% eased them. Hence, while the net change was positive, this was only marginally so and lower than in Q1 when the net percentage of banks easing their criteria stood at 10%.

The implication is that, when compared to 2014, corporates should now be able to more easily fulfil the criteria set by banks which in turn could expedite credit growth.

However, one has to account for the fact that the improvements reported since early 2014 came after years of tightening in credit standards. Indeed, the annual change in lending to enterprise remains negative with the latest data (for May 2015) showing a 0.3% decline. What is more, the BLS concluded that over Q3 no additional easing will take place.

On the demand side, banks reported that the enterprises’ appetite for loans is picking up and is seen gathering additional pace in the next three months (although past results show that banks tend to be over-optimistic in this respect). Of note, such a view is shared by the peripheral banks which speaks of increasing confidence and bodes well for the economic outlook.

Another interesting insight offered by the BLS is that Euroarea credit institutions “reported deteriorated access to retail deposit and debt securities financing, but improved access to the money market and securitisation in net terms, albeit to a lesser extent than in the previous round”. This is in line with the tightening in financial conditions experienced since late-April with the volatility in government yields being a relevant example.

Equally important, yesterday’s release shows that the participation in the TLTRO auctions is largely driven by profitability motives (66% of respondents) which is in line with the general belief that liquidity is rather abundant at this stage.

Looking forward, there seems to be limited scope for a significant rebound in the amounts raised through TLTROs which leaves QE as the main easing tool: “Looking ahead to the future TLTROs, a high percentage of banks are undecided on their participation, though the percentage of undecided banks has fallen relative to the previous survey (46% of banks in aggregate terms, as compared with 61% in the January 2015 BLS).

The decrease in undecided banks in the most recent survey was due to an increase in banks reporting that they will not participate in future TLTROs (28% of banks in aggregate terms, as compared with 17% in the January 2015 BLS).”

Reportedly, the Euroarea credit institutions intend to use the majority of TLTRO funds for lending, but there also seems to be a tendency towards stronger carry trading activity, with  larger proportion of firms reporting that that they would use the past TLTRO funds to purchase assets (20%, from 11% in the January 2015 BLS).

This suggests (i) the recent rebound in yields might have boosted the banks’ appetite for government paper and (ii) banks are not particularly enticed by the higher returns that can be achieved by lending the money to corporates rather than buying bonds.

This article was issued by Raluca Filip, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.