Trends in Lending. April 2011

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1 Trends in Lending April 11

2 BANK OF ENGLAND Trends in Lending April 11 This quarterly publication presents the Bank of England s assessment of the latest trends in lending to the UK economy. (1) It draws mainly on long-established official data sources, such as the existing monetary and financial statistics collected by the Bank that cover all monetary financial institutions. These data are supplemented by the results of a new data set, established by the Bank in late 8, to provide more timely data covering aspects of lending to the UK corporate and household sectors. (2) These data cover the major UK lenders: (3) Banco Santander, Barclays, HSBC, Lloyds Banking Group, Nationwide and Royal Bank of Scotland. Together they accounted for around 6% of the stock of lending to businesses, 4% of the stock of consumer credit, and 7% of the stock of mortgage lending at end-december. In future, key elements of this data set are to be included in the Bank s regular data collections, with data drawn from a wider range of reporters. (4) These data have provided a useful input to discussions between the major UK lenders and Bank staff, giving staff a better understanding of the business developments driving the figures and this intelligence is reflected in the report. The report also draws on intelligence gathered by the Bank s network of Agents and from market contacts, as well as the results of other surveys. The focus of the report is on lending, but broader credit market developments, such as those relating to capital market issuance, or trade credit, are discussed where relevant. The report covers official data up to February 11, supplemented by data from the major UK lenders and intelligence gathered up to end-march 11. Unless stated otherwise, the data reported cover lending in both sterling and foreign currency, expressed in sterling terms. The major UK lenders data are provided to the Bank on a best endeavours basis. This, together with their relative timeliness, means that they may not be as accurate as the established data sets for monetary financial institutions as a whole. As a result, care is needed in interpreting the major UK lenders data presented in this report. (1) Trends in Lending is a quarterly publication. See for future publication dates. (2) For a fuller background please refer to the first edition of Trends in Lending available at: (3) Membership of the group of major UK lenders is based on the provision of credit to UK-resident companies and individuals, regardless of the country of ownership. (4) For more information see

3 Contents Executive summary 3 1 Lending to UK businesses and individuals 4 Box Lending to small and medium-sized enterprises 7 2 Loan pricing 9 3 Credit supply and demand 12 Glossary and other information 14

4 Executive summary 3 Executive summary The stock of lending to UK businesses overall contracted in the three months to February, as did the stock of lending to small and medium-sized enterprises. The flow of net mortgage lending by UK-resident mortgage lenders picked up in January and February. Gross mortgage approvals for house purchase increased slightly in the three months to March, according to data from the major UK lenders, though remained subdued. Consumer credit rose in the three months to February. Spreads over reference rates on new lending continued to narrow for large businesses in 11 Q1, according to the Bank of England s Credit Conditions Survey, though were reported to have increased for small businesses. Spreads on quoted floating-rate mortgages have fallen during the past two years for loan to value ratios of up to 8%, and spreads narrowed for quoted fixed-rate mortgages at the 9% LTV ratio during 11 Q1. Effective interest rates on interest-bearing credit cards, personal loans and overdrafts rose slightly in the three months to February. Credit availability remained unchanged for secured lending, though increased slightly for businesses overall and for unsecured lending according to lenders in the Bank of England s 11 Q1 Credit Conditions Survey. Contacts of the Bank s network of Agents noted that small and medium-sized companies overall were experiencing tighter conditions than larger corporates, though credit conditions for some small and medium-sized companies with strong asset positions or cash flow had improved. Demand for credit from businesses remained subdued in 11 Q1 according to the major UK lenders. Demand for secured lending was reported in the Credit Conditions Survey to have fallen for house purchase but to have risen for remortgaging, with consumer credit demand broadly unchanged.

5 4 Trends in Lending April 11 1 Lending to UK businesses and individuals The stock of lending to UK businesses overall contracted in the three months to February, as did the stock of lending to small and medium-sized enterprises. The flow of net mortgage lending by UK-resident mortgage lenders picked up in January and February. Gross mortgage approvals for house purchase increased slightly in the three months to March, according to data from the major UK lenders, though remained subdued. Consumer credit rose in the three months to February. Chart 1.1 Lending to UK businesses and individuals (a) Unsecured Business Three-month annualised growth, per cent 4 Secured (a) Lending by UK monetary financial institutions to UK PNFCs, and by UK monetary financial institutions and other lenders to individuals. Data for business lending cover lending in both sterling and foreign currency, expressed in sterling terms. Data for secured and unsecured lending cover lending in sterling only. Seasonally adjusted. Table 1.A Lending to UK businesses (a) Averages Dec. Jan. Feb. Q3 Q4 Net monthly flow ( billions) Three-month annualised growth rate (per cent) Twelve-month growth rate (per cent) (a) Lending by UK monetary financial institutions to PNFCs. Data cover lending in both sterling and foreign currency, expressed in sterling terms. Seasonally adjusted. 1 This section presents a summary of the recent lending data to UK businesses and individuals. The stock of lending to businesses contracted in, albeit at a slower rate than during 9 (Chart 1.1). The rate of growth of corporate lending remained negative over the three months to February. In some contrast, growth in the stock of lending to individuals both secured and unsecured was stable, though low, over and similar to the picture in 9. This pattern continued in the three months to February, with growth in the stock of lending to individuals remaining positive but weak. Lending to UK businesses Official data covering lending by all UK-resident banks and building societies indicated that the stock of lending to businesses contracted by around billion in the three months to February (Table 1.A). Data from the five major UK banks (1) indicated that their net lending to businesses was - 2 billion in 11 Q1. The contraction in the stock of total business lending over the past year or so is consistent with data from the major UK banks, which indicated that their gross lending (non seasonally adjusted) decreased in each quarter between 9 Q3 and Q3 and was lower than repayments made to them. Gross lending by the major UK banks totalled 27 billion in 11 Q1, remaining slightly lower than repayments made to them. In some contrast to this pattern for gross lending, the total value of new syndicated lending facilities granted in the UK market increased in each quarter from 9 Q3 to Q4, though remained below the values seen prior to the financial crisis. The value of new syndicated lending facilities fell back in 11 Q1 (Chart 1.2). In recent discussions, some major UK lenders indicated that syndicated lending continued (1) Banco Santander, Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland. Non seasonally adjusted.

6 Section 1 Lending to UK businesses and individuals Chart 1.2 Estimates of syndicated lending facilities granted to UK businesses (a) Gross facilities granted non-resident banks (b) Gross facilities granted UK-resident banks (b) Scheduled maturities (c) Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q Sources: Dealogic and Bank calculations. billions 7 (a) Defined broadly as PNFCs. Data cover lending facilities in both sterling and foreign currency, expressed in sterling terms. Non seasonally adjusted. (b) New syndicated lending facilities excluding cancelled or withdrawn facilities. (c) Scheduled maturities of syndicated lending facilities excluding cancelled or withdrawn facilities, translated into sterling. Actual maturities will also reflect the effects of refinancing and prepayments, exchange rate changes and other effects. Chart 1.3 Sectoral breakdown of net capital market issuance by UK businesses (a) Utilities Mining and quarrying Transport, storage and communication Other Total billions (a) Data are half yearly. Funds raised by PNFCs from bonds, equity and commercial paper issuance. Data cover funds raised in both sterling and foreign currency, expressed in sterling terms. Non seasonally adjusted. Table 1.B Secured lending to individuals (a) 3 Averages Dec. Jan. Feb. Q3 Q4 Net monthly flow ( billions) Three-month annualised growth rate (per cent) Twelve-month growth rate (per cent) (a) Sterling lending by UK monetary financial institutions and other lenders to UK individuals. Seasonally adjusted. to be driven largely by the refinancing needs of companies, rather than for financing new investment projects. Previous editions of Trends in Lending have discussed how, for larger companies, capital market issuance can be an alternative source of finance to the loan market. Capital market issuance was unusually strong in 9, in large part reflecting issuance in the mining and quarrying and utilities sectors (Chart 1.3). Since then, net capital issuance across all sectors has slowed and was negative overall in H2, though remained positive for these two sectors. Net capital market issuance was close to zero in January and February, and with negative net lending over the same period, the total net amount of funds raised from banks and capital markets by UK businesses was negative. Some lenders noted that a limited supply of investment-grade bond issuance was leading some investors to move down the credit scale into the sub-investment grade bond market, where there were signs of a pickup in issuance activity. Notwithstanding the recent weakness of bank lending and capital market issuance, the majority of respondents in the Deloitte CFO Survey for 11 Q1 which covers very large companies indicated that they still viewed bond issuance and bank borrowing as attractive sources of finance, with equity issuance considered less attractive than debt finance. Small and medium-sized enterprises (SMEs) are more reliant on bank finance than larger companies whose access to capital market finance is greater. As a box on pages 78 discusses in more detail, the stock of lending to SMEs continued to contract in the three months to February. Secured lending to individuals The monthly flow of net sterling mortgage lending by UK-resident mortgage lenders picked up in January and February, with the annual rate of growth in the stock of lending stable at.7% (Table 1.B). According to data from the major UK lenders, net mortgage lending flows decreased slightly in March (Chart 1.4) as gross lending edged downwards with repayments little changed. Data provided by the major UK lenders include a split of gross lending between house purchase and the refinancing of existing mortgages (remortgaging). Gross mortgage lending for house purchase has edged lower since the middle of (Chart 1.4). In contrast, remortgaging activity picked up over the same period. In recent discussions, some major UK lenders partly attributed this pickup to the introduction of new products and greater competition in Q4. More recently, media coverage about the prospects for future rises in Bank Rate was said by some major UK lenders to have prompted some households to remortgage away from variable-rate mortgages to fixed-rate mortgages. Some lenders reported

7 6 Trends in Lending April 11 Chart 1.4 Mortgage lending by the major UK lenders (a) Remortgaging Other House purchase Net lending Gross lending Net lending (a) Jan. May Sep. Jan. May Sep. Jan. May Sep. Jan billions 2 (a) The split in 8 is estimated using gross lending data and the split of loan approval values between house purchase, remortgaging and other advances. The split from 9 onwards is reported data from the major UK lenders, rather than estimated data. Data cover lending in both sterling and foreign currency, expressed in sterling terms. Seasonally adjusted. Chart 1. Approvals for mortgages for house purchase (a) Major UK lenders (b) Major UK lenders (c) Total (d) 1 Thousands that remortgaging activity might increase further as increases in Bank Rate materialised. Notwithstanding the slight increase over recent months, remortgaging activity has remained weak relative to pre-crisis levels, reflected in low levels of mortgage repayments from this source. In addition, the major UK lenders reported that they had not experienced widespread overpayments of mortgages in, despite low interest rates on some variable-rate mortgages arranged prior to the financial crisis. Lenders offered a range of reasons for this, including a squeeze in disposable incomes, coupled with higher unemployment, as well as the availability of cash ISAs at higher interest rates. In some contrast to the pattern for remortgaging activity, approvals for house purchase weakened somewhat through. They increased slightly in the three months to March, according to data from the major UK lenders, though remained muted (Chart 1.). In recent discussions, some lenders reported expectations of subdued lending for house purchase in coming months. Consumer credit Total consumer credit flows rose in the three months to February, with positive flows in December and February partly offset by slightly negative flows in January (Table 1.C). The three-month annualised rate of growth was positive in all three months, with the rate in December the highest seen in two years, though remaining low compared to rates seen prior to the financial crisis. Within the total, net credit card lending flows remained weak over the three months to February. In contrast, non credit card lending flows picked up, with the three-month annualised rate of growth the highest since September 8. Jan. May Sep. Jan. May Sep. Jan. May Sep. Jan. May Sep. Jan (a) Seasonally adjusted. (b) Gross approvals data covering lending in both sterling and euros. (c) Gross approvals from additional, more timely, data reported by the major UK lenders since late 8. Data cover lending in all currencies. (d) UK monetary financial institutions and other lenders. These data are net of cancellations and hence the total can fall below the gross approvals data shown for the major UK lenders. Data cover lending in sterling only. Table 1.C Consumer credit (a) Averages Dec. Jan. Feb. Q3 Q4 Net monthly flow ( billions) Three-month annualised growth rate (per cent) Twelve-month growth rate (per cent) (a) Sterling lending by UK monetary financial institutions and other lenders to UK individuals. Seasonally adjusted.

8 Section 1 Lending to UK businesses and individuals 7 Lending to small and medium-sized enterprises This box provides an update on lending to small and medium-sized enterprises (SMEs), based on data collected in a regular survey of major lenders by the Department for Business, Innovation and Skills (BIS), and wider information. It follows previous boxes in October and earlier editions of Trends in Lending, and looks at developments over the past six months. Recent data SMEs are defined in the BIS survey as businesses with an annual turnover of up to 2 million. The survey covers data supplied by four major banking groups. (1) Total lending to SMEs reported in the survey accounts for around a quarter of the stock of lending to all UK businesses by banks and building societies. The BIS data indicate that the annual rate of growth in lending to SMEs has been negative since late 9 and fell to -3% in February 11 (Chart A). Data published by the British Bankers Association (BBA) indicate that the growth rate of lending to small businesses, defined as turnover up to 1 million, stood at -6% in December, the latest available month for which these data are available. (2) Annual lending growth to small businesses on this definition has been more negative than for the SME segment since June. Chart A Lending to small and medium-sized enterprises (a) All SMEs (b) Percentage changes on a year earlier Mar. June Sep. Dec. Mar. June Sep. Dec. Mar. June Sep. Dec Sources: BBA, BIS and Bank calculations. Small businesses (c) (a) Non seasonally adjusted. (b) Source: monthly BIS survey. Lending by four UK lenders to enterprises with annual bank account debit turnover less than 2 million. Data cover lending in both sterling and foreign currency, expressed in sterling terms. (c) Source: BBA. Lending by seven UK lenders to commercial businesses with an annual bank account debit turnover of up to 1 million. Sterling only. Available at 1 Supply and demand Respondents to the Bank of England s 11 Q1 Credit Conditions Survey reported that credit availability to small and medium-sized businesses was broadly unchanged in 11 Q1, and that it was expected to remain stable in 11 Q2. This is consistent with the reports from the major UK lenders of little change in credit conditions for SMEs. Reports over the past six months from the Bank s network of Agents, based on their contacts with businesses, have typically indicated that the availability of credit has remained tighter for SMEs than for larger corporates. For example, some smaller businesses have reported that requirements to offer personal guarantees have discouraged them from proceeding further with credit applications, and that credit application procedures have been onerous. Some SMEs have also reported that banks have been seeking to replace overdraft facilities with alternative, more expensive, credit products. In recent discussions, a number of the major UK lenders reported that they were seeking to develop improved awareness of alternative credit products, such as leasing or invoice finance, among their SME client base and client-facing staff. Demand for credit by smaller businesses was reported to have fallen sharply in the 11 Q1 Credit Conditions Survey, although a recovery in demand was expected in the following quarter. Little change in demand for credit by medium-sized SMEs was reported for 11 Q1, while slightly higher demand was expected in the following quarter. In recent discussions, the major UK lenders reported that trends in applications for new credit and flows of new lending to SMEs have been broadly flat, or negative, over the preceding six months. Consistent with this, BIS data indicated that the value of applications by SMEs for new term loan and overdraft facilities in the six months to February was 19% lower than in the same period a year earlier. Some lenders reported that demand for credit remained muted because SMEs were cautious about business prospects. Evidence from manufacturing firms reported in the January 11 CBI Quarterly SME Trends Survey (3) indicated little change over the past six months in SMEs optimism about the business situation, with business optimism broadly similar across small and medium-sized SMEs. The proportion of manufacturing SMEs citing credit or finance as a factor likely to limit output over the next three months was 6%, a figure little changed from the October and preceding CBI Surveys. More recently, the FSB Small Business Index of business prospects rose in 11 Q1, though remained lower than a year earlier.

9 8 Trends in Lending April 11 Loan pricing As noted in Section 2, respondents to the Credit Conditions Survey reported that spreads over reference rates, and fees and commissions had decreased during 11 Q1 for medium-sized businesses, but had increased slightly for small businesses. Estimates of median interest rates charged on new variable-rate loan and overdraft facilities to SMEs, based on data from the BIS survey, have remained little changed over the past six months (Chart B). The major UK lenders reported that they had not changed their pricing policies that is, interest rates conditional on the credit quality of the loan application over this period. Within the total, estimates of rates charged to small companies have, however, continued to drift upwards, which might indicate that weak economic activity has affected these companies in particular. In recent discussions, however, most lenders reported that the credit quality of SME applications was broadly unchanged over the past six months. Chart B Indicative median interest rates on new SME variable-rate facilities (a) Per cent 6 Smaller SMEs (b) All SMEs Medium SMEs (c) Bank Rate 1 Nov. Feb. May Aug. Nov. Feb. May Aug. Nov. Feb Sources: BIS and Bank calculations. (a) Median by value of new SME facilities priced at margins over base rates, by four major lenders. (b) SMEs with annual bank account debit turnover under 1 million. (c) SMEs with annual bank account debit turnover 1 million to 2 million. (1) Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland. (2) The BBA measure covers lending to small businesses of up to 1 million annual bank account debit turnover, and is derived from a wider panel of reporting banks than the BIS measure. (3) CBI Quarterly SME Trends Survey, January 11. Available at

10 Section 2 Loan pricing 9 2 Loan pricing Spreads over reference rates on new lending continued to narrow for large businesses in 11 Q1, according to the Bank of England s Credit Conditions Survey, though were reported to have increased for small businesses. Spreads on quoted floating-rate mortgages have fallen during the past two years for loan to value ratios of up to 8%, and spreads narrowed for quoted fixed-rate mortgages at the 9% LTV ratio during 11 Q1. Effective interest rates on interest-bearing credit cards, personal loans and overdrafts rose slightly in the three months to February. This section discusses recent developments in loan pricing for businesses and individuals, based on statistical data, survey evidence and discussions with the major UK lenders. The total cost of bank finance to a company or individual can generally be decomposed into the fees charged by the lender to provide loan facilities, the spread over a given reference rate (such as three-month Libor or Bank Rate) at which loans are offered, and the prevailing level of that reference rate in the financial markets. Previous editions of Trends in Lending have discussed the increase in spreads over reference rates on new lending since the start of the financial crisis. To some extent, elevated spreads reflect heightened credit risk on lending and a repricing of risk. But they are also likely to reflect the relatively high cost to lenders of raising longer-term funding. Chart 2.1 Indicative long-term funding spreads Five-year CDS premia for the major UK lenders (a) Spread on five-year retail bonds (b) Percentage points 3. Spread on three-year retail bonds (b) Jan. May Sep. Jan. May Sep. Jan. May Sep. Jan. May Sep. Jan Sources: Markit Group Limited, Bank of England and Bank calculations. (a) The spread on long-term wholesale bonds is proxied by an unweighted average of the five-year CDS premia for the major UK lenders. (b) Sterling only. Spread over the relevant swap rate. The three-year and five-year retail bond rates are weighted averages of rates from banks and building societies within the Bank of England s normal quoted rate sample with products meeting the specific criteria (see The series for the five-year bond is not published for May and January 11 as only two or fewer institutions in the sample offered products in that period Conditions in longer-term wholesale funding markets were volatile in 11 Q1, according to some major UK lenders. They reported however, that markets had been more resilient than during the turbulence of May, so that over the period as a whole, lenders access to funding was said not to have been materially constrained. Some major UK lenders indicated that the cost of debt issuance had fallen somewhat. An indicative measure of the spread on wholesale bonds the five-year CDS premia of the major UK lenders remained elevated and picked up in January before falling slightly in February and March (Chart 2.1). Spreads over reference rates on longer-term retail deposits such as those over equivalent-maturity swap rates for three and five-year fixed-rate bonds fell between December and February before picking up again in March. The movements in spreads in 11 Q1 primarily reflected movements in relevant swap rates during this period, with deposit interest rates little changed. The major UK lenders reported that competition in the retail funding market had remained intense in recent months.

11 Trends in Lending April 11 Chart 2.2 Credit Conditions Survey: spreads over reference rates on lending to corporates by firm size (a)(b) Dearer credit Cheaper credit Chart 2.3 Effective interest rate on new lending to UK businesses (a) Effective interest rate on new lending Three-month Libor Jan. May Sep. Jan. May Sep. Jan. May Sep. Jan. May Sep. Jan Per cent (a) PNFCs. Sterling only. The Bank s effective interest rates series are currently compiled using data from 22 UK monetary financial institutions. Data for three-month Libor are to end-march and for the effective rate to end-february. Non seasonally adjusted. Floating mortgage rate Net percentage balances 8 Small businesses Medium PNFCs Large PNFCs 4 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q (a) Net percentages balances are calculated by weighting together the responses of those lenders who answered the question. The blue bars show the responses over the previous three months. The red diamonds show the expectations over the next three months. Expectations balances have been moved forward one quarter so that they can be compared with the actual outturns in the following quarter. (b) A positive balance indicates that spreads over reference rates have become narrower, such that all else being equal, it is cheaper for corporates to borrow. Chart 2.4 Effective rates on new mortgage lending (a) Fixed mortgage rate Overall mortgage rate Per cent 8 (a) Sterling only. The Bank s effective interest rates series are currently compiled using data from 22 UK monetary financial institutions. Non seasonally adjusted. 6 4 Corporate loan pricing Spreads over reference rates on new lending for large businesses continued to narrow in 11 Q1 according to the Bank of England s Credit Conditions Survey (Chart 2.2), with fees and commissions also reported to have fallen. Contacts of the Bank s network of Agents reported that increased competition had lowered the cost of borrowing in recent months, although it was still high compared to pre-crisis levels. In some contrast, the balance of respondents in the Deloitte CFO Survey reporting credit to be costly increased in 11 Q1, though remained lower than a year earlier. Similar to the view in the Credit Conditions Survey on spreads for large businesses, the major UK lenders reported a further narrowing in spreads and increase in tenors in the investment-grade segment of the syndicated lending market. Some lenders also reported that pricing was tightening somewhat for more highly leveraged syndicated loans, though issuance levels remained low relative to those seen prior to the financial crisis. Spreads over reference rates on lending to medium-sized businesses had also narrowed and fees and commissions had fallen in 11 Q1, according to lenders in the Credit Conditions Survey (Chart 2.2). For small businesses, however, respondents in the Credit Conditions Survey reported that spreads, fees and commissions had risen over this period. A box on pages 78 provides more details of loan pricing to SMEs including estimates of interest rates on new variable-rate facilities for SMEs derived from Department for Business, Innovation and Skills data. Looking forward, lenders in the Credit Conditions Survey expected spreads on lending to larger companies to fall further in the coming quarter. Spreads were expected to remain unchanged for medium-sized businesses and widen for small businesses. The effective interest rate on new borrowing for businesses overall, which may include new lending on facilities arranged earlier at low pre-crisis rates, remained little changed over the past year, though ticked up slightly in the three months to February (Chart 2.3). In recent discussions, most major UK lenders expected loan pricing across business sizes to remain broadly unchanged in the coming months. Mortgage pricing The Bank s measures of the effective overall mortgage rate and the fixed mortgage rate on new lending have fallen over the past two years (Chart 2.4). Spreads over the relevant swap reference rates for quoted fixed-rate mortgages have also fallen over this period. In contrast, the Bank s measure of the effective new floating mortgage rate has changed little over this period such that spreads over Bank Rate have been broadly unchanged, remaining elevated. The picture at the

12 Section 2 Loan pricing 11 Chart 2. Number of floating-rate mortgage products and spreads across LTV ratios (a)(b) March 9 March March 11 Credit cards (interest-bearing only) Credit cards (all) New personal loans (b) Spread over Bank Rate (percentage points) 6 Up to and above Loan to value ratio (per cent) Sources: Moneyfacts Group and Bank calculations. (a) End-month advertised rates for products with different loan to value (LTV) ratios. (b) Size of bubble reflects number of products. The spread is calculated over Bank Rate at the end-month for the relevant period. The first observation on the left is for products up to 6% LTV, the second is for products in the 66%7% range, the third is for products in the 76%8% range and the final observation on the right is for products above 86% LTV. Chart 2.6 Effective interest rates on consumer credit (a) Overdrafts Per cent 1 aggregate level, however, masks changes in spreads across different loan to value (LTV) ratios (Chart 2.). Data on quoted floating-rate mortgage products indicate that spreads at LTV ratios up to 8% fell between March 9 and March 11 but increased at the highest LTV ratios (Chart 2.). However, in 11 Q1 spreads over swap rates on quoted two year fixed-rate mortgages at the 9% LTV ratio fell by more than basis points. Respondents to the 11 Q1 Credit Conditions Survey reported that spreads on total new secured lending had fallen for the fourth successive quarter and expected spreads to fall further in 11 Q2. Fees on secured lending were also reported to have fallen in 11 Q1, but were expected to increase in the coming quarter. Consumer credit pricing Effective interest rates on interest-bearing credit cards, personal loans and overdrafts increased slightly in the three months to February (Chart 2.6). Respondents to the 11 Q1 Credit Conditions Survey reported that spreads on credit card lending had increased slightly over the previous three months, while spreads on non credit card lending had fallen. More generally, spreads between effective rates and Bank Rate and Libor for consumer credit as a whole remain significantly wider than in late 8, which lenders report partly reflects heightened credit risk on this form of lending. Lenders in the Credit Conditions Survey expected that spreads on total unsecured lending would be broadly unchanged in 11 Q2. Three-month Libor Bank Rate (a) Sterling only. The Bank s effective interest rates series are currently compiled using data from 22 UK monetary financial institutions. The rate for personal loans is for new business. For the other series the rates shown are for the stock of lending, as comparable data for new lending are not available. Data for Bank Rate and three-month Libor are to end-march and for effective rates to end-february. Non seasonally adjusted. (b) Only available from January 4.

13 12 Trends in Lending April 11 3 Credit supply and demand Credit availability remained unchanged for secured lending, though increased slightly for businesses overall and for unsecured lending according to lenders in the Bank of England s 11 Q1 Credit Conditions Survey. Contacts of the Bank s network of Agents noted that small and medium-sized companies overall were experiencing tighter conditions than larger corporates, though credit conditions for some small and medium-sized companies with strong asset positions or cash flow had improved. Demand for credit from businesses remained subdued in 11 Q1 according to the major UK lenders. Demand for secured lending was reported in the Credit Conditions Survey to have fallen for house purchase but to have risen for remortgaging, with consumer credit demand broadly unchanged. Chart 3.1 Credit Conditions Survey: availability of credit (a)(b) Decrease Increase Corporate Households secured Net percentage balances Households unsecured 4 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q (a) See footnote (a) to Chart 2.2. (b) A positive balance indicates that more credit is available. Chart 3.2 Deloitte CFO Survey: cost and availability of credit (a) Costly Cheap Cost of credit Net percentage balances Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q4 Q2 Q4 Q2 Q4 Q2 Q Source: Deloitte CFO Survey 11 Q1. Availability of credit Available Hard to get (a) Net percentages for the cost of credit are calculated as the percentage of respondents reporting that bank credit is costly less the percentage reporting that it is cheap. Net percentages for the availability of credit are calculated as the percentage of respondents reporting that credit is available less the percentage of respondents reporting that it is hard to get. A positive balance indicates that a net balance of respondents report that credit is costly or there is availability of credit The amount of lending and its price depend on the interaction of demand and supply factors. Disentangling the separate influences of changes in the supply of, and demand for, credit is difficult though survey data can help. This section looks at recent trends in credit supply and demand, drawing on surveys, reports from the Bank s network of Agents and discussions with the major UK lenders. Credit conditions for businesses Credit availability for businesses overall increased somewhat in 11 Q1 (Chart 3.1), according to respondents to the Credit Conditions Survey, which they attributed to a slight increase in risk appetite and market share objectives. Within that, respondents reported that credit availability had increased slightly for large businesses. This is consistent with the view of the respondents chief financial officers of very large companies to the Deloitte CFO Survey 11 Q1 who reported an increase in their access to credit (Chart 3.2). Contacts of the Bank s network of Agents noted that small and medium-sized companies overall were experiencing tighter conditions than larger corporates, though credit conditions for some small and medium-sized companies with strong asset positions or cash flow had improved. Lenders in the Credit Conditions Survey reported that credit availability was unchanged for small and medium-sized businesses (Chart 3.3). Demand for credit from businesses overall was reported to be subdued, according to the major UK lenders. Respondents to the Credit Conditions Survey in 11 Q1 reported that demand from large businesses had increased but had fallen sharply from small businesses (Chart 3.3). Lenders in the survey, however, expected demand from small and medium businesses to increase over the next quarter.

14 Section 3 Credit supply and demand 13 Chart 3.3 Credit Conditions Survey: availability and demand for credit across firm sizes reported in the 11 Q1 survey (a)(b) Increase Decrease Small businesses Medium PNFCs Large PNFCs Availability Net percentage balances 4 Demand (a) Net percentages are calculated by weighting together the responses of those lenders who answered the question. The bars in the chart show the net percentage balance reported over the three months to early March. The diamonds show the associated expectations for the next three months. (b) In the first panel, a positive balance indicates that more credit is available. In the second panel, a positive balance indicates an increase in demand. Chart 3.4 Credit Conditions Survey: demand for household secured lending (a)(b) Increase Decrease House purchase Net percentage balances Remortgaging Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q (a) See footnote (a) to Chart 2.2. (b) A positive balance indicates an increase in demand. Chart 3. Credit Conditions Survey: demand for household unsecured lending (a)(b) Decrease Increase Credit card Net percentage balances Unsecured Credit conditions for households The amount of new secured credit made available to households was little changed over the previous quarter according to the 11 Q1 Credit Conditions Survey (Chart 3.1), though increased for lending to borrowers with high LTV ratios. Respondents expected the availability of secured lending to increase in 11 Q2, citing market share objectives as a factor. The availability of secured lending to borrowers with high LTV ratios was expected to increase further in the coming quarter, according to the lenders in the survey. Household demand for secured lending for house purchase fell in line with expectations in 11 Q1, according to a balance of respondents to the Credit Conditions Survey (Chart 3.4) and was expected to fall further over the next three months. The Royal Institution of Chartered Surveyors new buyer enquiries balance remained negative over the past three months, indicating a weakening in demand for house purchase. Contacts of the Bank s Agents reported that demand for house purchase had been constrained by concerns about future incomes and prospects for house prices. In contrast, lenders in the Credit Conditions Survey reported that demand for secured lending for remortgaging increased significantly over the same period and expected a further increase in the next quarter. In some contrast to secured lending, total demand for consumer credit was broadly unchanged in 11 Q1 according to respondents to the Credit Conditions Survey. Within the total however, demand for credit card borrowing was unchanged with demand for other unsecured loans falling slightly on the quarter (Chart 3.). Lenders expected total demand for consumer credit to increase slightly in 11 Q2. On credit availability, respondents to the Credit Conditions Survey reported that the amount of unsecured credit made available to households increased slightly in 11 Q1 and was expected to increase again in 11 Q2 (Chart 3.1). Lenders in the survey indicated that an increased appetite for unsecured credit risk and market share objectives had contributed to the increase in credit availability. In recent discussions, some major UK lenders commented that an increase in zero per cent balance transfer offers and periods in 11 Q1 had increased credit availability for credit cards. Some lenders noted an increase in competition for these balances which were seen to be at the higher end of the credit quality spectrum. 4 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q (a) See footnote (a) to Chart 2.2. (b) A positive balance indicates an increase in demand.

15 14 Trends in Lending April 11 Abbreviations BBA British Bankers Association. BIS Department for Business, Innovation and Skills. CBI Confederation of British Industry. CDS credit default swap. CFO chief financial officer. FSB Federation of Small Businesses. ISA individual savings account. Libor London interbank offered rate (see below). LTV ratio loan to value ratio (see below). PNFCs private non-financial corporations (see below). SMEs small and medium-sized enterprises. Glossary Bank Rate The official rate paid on commercial bank reserves by the Bank of England. Businesses Private non-financial corporations. Consumer credit Borrowing by UK individuals to finance expenditure on goods and/or services. Consumer credit is split into two components: credit card lending and other lending (mainly overdrafts and other loans/advances). Effective interest The weighted average of calculated rates interest rates on various types of sterling deposit and loan accounts. The calculated annual rate is derived from the deposit or loan interest flow during the period, divided by the average stock of deposit or loan during the period. Facility An agreement in which a lender sets out the conditions on which it is prepared to advance a specified amount to a borrower within a defined period. Gross lending The total value of new loans advanced by an institution in a given period. Loan approvals Lenders firm offers to advance credit. Loan to value (LTV) Ratio of outstanding loan amount to the ratio market value of the asset against which the loan is secured (normally residential or commercial property). London interbank The rate of interest at which banks offered rate (Libor) borrow funds from each other, in marketable size, in the London interbank market. Major UK lenders Banco Santander, Barclays, HSBC, Lloyds Banking Group, Nationwide and Royal Bank of Scotland. Monetary financial A statistical grouping comprising banks institutions (MFIs) and building societies. Mortgage lending Lending to households, secured against the value of their dwellings. Net lending The difference between gross lending and gross repayments of debt in a given period. Private All corporations whose primary activity is non-financial non-financial, and that are not controlled corporations by central or local government. (PNFCs) Reference rate Remortgaging Swap rate Tenor The rate on which loans are set, with an agreed margin over the reference rate (typically this will be Bank Rate, Libor or a swap rate). A process whereby borrowers repay their current mortgage in favour of a new one secured on the same property. A remortgage would represent the financing of an existing property by a different mortgage lender. The fixed rate of interest in a swap contract in which floating-rate interest payments are exchanged for fixed-rate interest payments. Swap rates are a key factor in the setting of fixed mortgage rates. The time remaining until repayment of the principal on a loan or other debt instrument. Symbols and conventions Except where otherwise stated the source of data in charts is the Bank of England. On the horizontal axes of graphs, larger ticks denote the first observation within the relevant period, eg data for the first quarter of the year. Bank of England 11 ISSN: (online)

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