Gross New Lending to SMEs Was €200 million Higher in Q1 2016
OREANDA-NEWS. Gross new lending to SMEs was €200 million higher in Q1 2016 when compared to Q1 2015, as draw-downs, particularly for property investment and development, continued to increase.
Gross new lending to non-financial, non-property related SMEs, at €657 million in Q1 2016, was almost identical to the same quarter in 2015. Draw-downs for agricultural purposes continue to dominate, despite consistently attracting higher than average interest rates.
Property-related lending to SMEs no longer constitutes the largest share of outstanding credit to SMEs. However, the sector accounted for a third of gross new non-financial draw-downs during Q1 2016. There is, however, significant differences in interest rates charged to property-related lending. Lower than average rates apply to new SME lending for real-estate, but the reverse is true for construction.
The diverging trends between SMEs and larger enterprises continued in Q1 2016, with large businesses continuing to be net borrowers and SMEs, net repayers.
Deposits flows from all non-financial private-sector enterprises increased by €839 million in early-2016, following consistent increases since early-2013. In contrast to overall trends, there was a large deposit outflow by the wholesale/retail sector, which also recorded large net repayments over the quarter.
SME Credit and Interest Rate developments
Bank credit to all Irish SMEs declined for the fifteenth consecutive quarter in Q1 2016. The outstanding stock of SME credit declined by 2.6 per cent over Q1 2016 to stand at €41.5 billion. This represented an annual decrease of 10 per cent.
The outstanding stock of SME credit includes €9.3 billion of financial intermediation credit, €14.4 billion relating to property (real-estate and construction) and €17.8 billion of non-financial, non-property, or ‘core’, credit.
Property-related lending to SMEs no longer constitutes the largest share of outstanding SME credit, mainly due to loan sales and large repayments over 2015. In annual terms, property-related SME loans declined by 12 per cent in the first quarter of 2016, with SMEs engaged in this sector repaying €2.4 billion more than was drawn down in new loans.
Despite declines in outstanding credit to property-related SMEs, gross new lending has been increasingsince early-2015, with €962 million drawn down over the past 12 months (Chart 1). In Q1 2016, €322 million was drawn down, representing 33 per cent of new non-financial SME lending. Real-estate SME lending typically attracts lower than average interest rates, with the reverse applying to construction.
Repayments by the SME’s remain high (Chart 2), albeit Q1 data was lower than the previous year. Property-related SMEs continued to account for a large share of repayments in Q1 ‘16.
Lending to core SMEs contracted by 8.6 per cent, year-on-year in Q1, as €1.7 billion more was repaid than was drawn down. This was mainly driven by wholesale and retail SMEs. Credit to core SMEs has declined markedly in contrast to larger enterprises, which have been net borrowers in five of the last six quarters (Chart 3).
New lending drawdowns by core SMEs continues to gradually increase, despite large net repayments. New drawdowns totalled €2.6 billion over the past 12 months; 3.9 per cent higher than the previous period. Many core SME sectors have seen a rise in new lending as a proportion of outstanding stock, implying a rebalancing of banks’ balance sheets.
The primary industries sector was the largest recipient of new SME lending over Q1 2016, drawing down €200 million (Chart 1); this marked the highest drawdown since the series began in 2010. Repayment volumes by these SMEs declined in Q1, resulting in more new loans being drawn down than were repaid.
Four SME sectors registered underlying increases in net lending (drawdowns exceeded repayments). Primary industries and transportation and storage recorded a combined net increase of €48 million (Chart 4).
Interest rates on loans to SMEs
The weighted average interest rate on new non-financial SME loan draw-downs during the first quarter of 2016, was 4.44 per cent (Chart 5). This represents a 27 basis point decline over the year. Rates on new lending are nonetheless higher than those applying to the existing stock of Irish SME loans, which averaged 3.06 per cent at end-Q1.
New lending rates have declined for SMEs in most economic sectors since Q1 2015 (Chart 6). The most notable were interest rate declines to SMEs engaged in transport and storage (136 basis points) and real-estate (93 basis points). Construction SMEs experienced a weighted average decline of 100 basis points since Q1 2015, although they continue to attract one of the highest interest rates on new drawdowns.
Higher than average rates apply to new draw-downs by SMEs engaged in the agriculture and wholesale/retail; sectors that typically secure the largest shares of new lending. Rates on lending for community and social purposes were also notably higher than average. Rates on new draw-downs to construction SMEs, at 5.63 per cent, remained significantly higher than rates to the real-estate sector, at 3.30 per cent (Chart 6).
The margin between total rates charged on new (non-financial) draw-downs and existing loans continued to decline in Q1, albeit remaining elevated at 138 basis points (Chart 7). Electricity and supply service SMEs remain the only sector to record lower rates on new draw-downs compared to the existing stock of loans.