ECB sees tentative signs of healing in euro banks

AFP, Reuters/Frankfurt / Lisbon

Europe’s battered financial sector is showing tentative signs of healing, even if it is still too early to sound the all-clear, a key ECB survey showed yesterday.

Credit conditions in the euro area may still be tightening, but are set to do so at a slower rate in the coming months, the European Central Bank found in its quarterly bank lending survey.

The net percentage of banks expecting to tighten their loan criteria for businesses and households was unchanged at 7% in the second quarter compared with the first quarter, the ECB said.

But the proportion was expected to decline to 1% in the third quarter.

At the same time, the survey found that banks’ access to retail and wholesale funding had continued to improve in the second quarter of 2013 as the eurozone sovereign debt crisis abated, the ECB said.

However, “in the third quarter of 2013, euro area banks expect a marginal deterioration in funding conditions for most market segments, except in the case of retail funding,” it cautioned.

On the demand side, “developments in the second quarter of 2013 were mixed,” the ECB found.

On the one hand, fewer euro area banks reported a decline in the demand for loans. On the other hand, this net percentage remained below the historical average.

Among a wide range of emergency anti-crisis measures, the ECB has pumped unprecedented volumes of liquidity into the financial system to avert a dangerous credit crunch.

But banks have been slow to lend that money on to businesses, particularly in the countries hardest-hit by the crisis.

“Looking forward to the third quarter of 2013, banks expect the net decline in demand for loans across all loan categories to continue,” the ECB said.

Berenberg Bank economist Christian Schulz said the ECB’s bank lending survey “confirms that the financial sector is showing signs of healing.”

But the data nevertheless presented a rather mixed picture, said Ernst & Young Eurozone Forecast economist Marie Diron.

“Optimists will see some encouraging signals in today’s ECB Bank Lending Survey. However, these are only very tentative signals of an improvement in credit conditions and they are certainly not strong enough to suggest that the ECB can congratulate themselves on a ‘job done’,” Diron said.

The expert argued that monetary policy needed to do more to support easier credit conditions.

Natixis economist Cedric Thellier was also cautious, saying that with macroeconomic uncertainty expected to remain substantial “over the next quarters, the situation regarding credit standards and demand should remain” quite difficult.

The European Commission, meanwhile, said yesterday that the three Portuguese banks which had tapped bailout funds were on the right path to become viable by cutting costs and selling assets without needing to seek additional state aid.

The European Union executive said it has finalised discussions on restructuring plans for state-owned CGD and privately-owned peers Banco BPI and Millennium BCP, the banks that resorted to a line from Lisbon’s May 2011 bailout to boost their capital ratios.

“CGD, BPI and BCP are on the right track to become viable in the long term, in a challenging macroeconomic environment,” EC vice-president Joaquin Almunia said in a statement. He said their plans showed they could achieve this “without continued state support.”

“I am also satisfied that the taxpayer’s money spent for the restructuring of the banks will be limited to the minimum as they will repay the state aid they have received, with an appropriate remuneration,” he added.

The sector borrowed around half of the €12bn earmarked for banks in Portugal’s €78bn bailout as they struggled under a credit squeeze and rising bad loans amid the country’s biggest recession since the 1970s.

The Commission said it has approved the restructuring plans for CGD and Banco BPI, adding that regarding BCP it had finalised discussions with Portuguese authorities and will adopt a decision on the bank’s plans in coming weeks.

“The banks will improve the profitability of their domestic operations, in particular by reducing their staff numbers and the size of their branch networks ... and ensure continued lending to the Portuguese economy,” the Commission said.

It confirmed that CGD is set to divest its insurance arm.

Analysts say BCP, which was hit hard by loan impairments and exposure to Greece and drew 3bn euros from the bailout, may have to sell its Romanian unit.

The Portuguese government welcomed the Commission’s statement.

“It confirms an important and successful step to guarantee financial stability and solidity of Portuguese banks,” the finance ministry said in a statement.