Trends in Business Credit and Deposits: Q2 2015

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Gross new lending to core SMEs increased by 32 per cent in Q2 2015 over the same quarter in 2014. The increased lending was driven by the motor trade and primary industry sector. However, repayments by core SMEs continue to outpace new borrowing activity, resulting in an annual decline of 9.6 per cent in the stock of outstanding loans in June 2015.

• Gross new lending to non-financial, non-property related SMEs amounted to €2.7 billion over the twelve month period to end-Q2 2015; this was almost 31 per cent (€637 million) higher than the previous twelve month period to end-Q2 2014.
• Interest rates charged on new draw-downs by non-financial, non-property related SMEs was 4.9 per cent during Q2 2015, a 25 basis point decline from the previous quarter.
• The primary industries sector comprised the largest share of gross new lending in Q2, with property-related sectors securing an increasing proportion of new lending.
• While outstanding credit to property-related SMEs fell by €380m over the quarter, gross new lending of €178m was the highest recorded since Q4 2011.
• Outstanding credit to non-financial, non-property SMEs continued to decline in both annual and quarterly terms as repayments continue to exceed new lending. Credit to large enterprises, however, registered both annual and quarterly increases.
• Deposits from non-financial Irish resident private-sector enterprises increased by €1.1 billion in Q2 2015, to stand at €46.7 billion. The past two years has seen a period of sustained growth in deposits from non-financial enterprises, which grew by 10.7 per cent in the year to end-Q2 2015. Deposits increased in eight of the fifteen non-financial sectors.

Credit Advanced to SMEs

The outstanding stock of credit advanced to Irish SMEs by resident credit institutions decreased 10.2 per cent in the year to end-Q2 2015, to stand at €50.6 billion.² This represented a 1.8 per cent decline over Q2; the twelfth consecutive quarter of decline.
The outstanding stock of SME credit at end-Q2 included €9.9 billion relating to financial intermediation³, €20.9 billion related to property and €19.9 billion related to non-financial, non-property, or ‘core’, sectors.

Credit to non-financial SMEs fell by 1.7 per cent during the quarter (compared to 3.5 per cent in Q1) and by 9.6 per cent over the year. This reflected net repayments of €731 million and €4.7 billion, respectively.

Property-related lending to SMEs, constitutes the largest share of outstanding credit to non-financial SMEs, at 51 per cent. Lending to SMEs in these sectors fell by a combined 1.7 per cent over the quarter (net flow of minus €380 million). This was noticeably lower than in recent quarters. Additionally, gross new lending to property-related SMEs of €178m was at its highest level since Q4 2011. This represented a 20 per cent share of total new SME lending at (Chart 1); equivalent to 0.8 per cent of Q1 outstanding property-related credit. Repayments by property-related sectors, while remaining elevated, slowed compared to previous quarters.

Credit advanced to non-property, non-financial (core) SMEs contracted 7.6 per cent (€1.7 billion) in the twelve months to end-Q2 2015. Over the quarter, SME repayments exceeded drawdowns by €351 million (1.7 per cent), up slightly on previous quarter. Credit to SMEs has declined at a proportionally faster rate than larger enterprises (Chart 2).

New lending drawdowns to core SMEs totaled €715 million during Q2 2015⁴. This was a 32 per cent increase when compared with the same period in 2014. Most core sectors have seen a rise in new lending as a proportion of outstanding stock, implying a rebalancing of credit institutions balance sheets. The primary industries sector regained its place as the largest recipient of new SME lending (€184 million), followed closely by the wholesale/retail trade and repairs sector, which had been the largest recipient for the two previous quarters (Chart 2). The SME sector continues to repay significant amounts (Chart 3), with the property sector accounting for over a third of repayments.

Note: Repayments is a proxy series and is derived from the gross new lending and net flows series.

Most core SME sectors, however, registered underlying declines in net lending (repayments exceeded drawdowns) with only three sectors recording increases during Q2 (Chart 4). The highest net flow increase was to information and communication (€13 million). The wholesale/retail trade and repairs sector registered the largest decline of €200 million.

Interest rates on loans to SMEs⁵

The total weighted average interest rate on new non-financial SME loan draw-downs during Q2 2015, was 4.7 per cent. This represents a 40 basis point decline from the previous quarter. In contrast, the existing stock of Irish SME loans carry a weighted average interest rate of 3.1 per cent as at end-Q2 2015 (Chart 5). Outstanding stock data includes any renegotiations of existing loans, which are excluded from new draw-downs.

SMEs in most economic sectors experienced declining new lending rates during the second quarter of the year. Of note were rate declines to SMEs engaged in other community, social and personal services sectors (163 basis points) and in the real estate activities sector (75 basis points). Wholesale/retail trade and repairs and business and administration-related SMEs, however, experienced rate increases of 30 and 28 basis points, respectively.

Chart 6 shows the sectoral lending rates to Irish SMEs by a representative sample of resident banks. Of note is the higher rates charged on new draw-downs by SMEs engaged in the transportation and storage, business and administration, and agriculture sectors. These sectors typically secure the largest shares of new lending. Rates on construction-related new draw-downs, at 6.4 per cent, were the highest in the quarter. This was a marked contrast in rates to the real-estate sector, which attracted one of the lowest rates on new draw-downs, at 3.5 per cent.

Credit Advanced to All Irish Resident Private-Sector Enterprises

The total amount of credit outstanding to Irish private-sector enterprises on the balance sheet of resident credit institutions was €123.4 billion at end-June 2015. Approximately 54 per cent of this amount was with respect to the financial intermediation sector, which would include holdings of debt securities issued by the NAMA Master SPV and other financial vehicle corporations. Excluding financial intermediation, the total amount of private-sector enterprise credit outstanding was €56.8 billion at end-Q2 2015.

Outstanding credit to the non-financial private-sector declined 7.2 per cent in the year to end-Q2 2015, equivalent to a net annual flow of minus €4.9 billion (Chart 7). The decline was largely driven by real estate credit, which fell by 11.5 per cent (€4 billion) over the year, with property-related SMEs accounting for most of the fall.

When property-related (real-estate and construction) and financial sectors are excluded, credit advanced to Irish private-sector enterprises stood at €30 billion at end-Q2 2015, representing an annual decline of 2.4 per cent (€815 million). Annual developments were mainly driven by declines of 6.7 per cent in credit advanced to the hotels and restaurants sector.

Non-property, non-financial loan repayments exceeded drawdowns by €95 million in Q2 (minus 0.3 per cent), compared to net repayments of €563 million in the previous quarter. The wholesale/retail trade and repairs sector registered the largest quarterly decline, with five non-financial, non-property related sectors registering a positive net lending flows.

Deposits from Irish Resident Private-Sector Enterprises

Deposits from all Irish private-sector enterprises increased by €1.9 billion (2.3 per cent) during Q2 2015 to stand at €85 billion. In annual terms, Irish resident private-sector enterprises deposits declined 1.3 per cent, (minus 9 per cent at end-Q1). See Chart 9.
The financial intermediation sector (excluding monetary financial institutions) mainly accounted for the developments in annual deposits, with a decline of €5.6 billion over the year. This was partly related to a large transaction between affiliated entities in Q4 2014.

Excluding financial intermediation, deposits from private-sector enterprises increased by 10.7 per cent (€4.5 billion) in the year to end-Q2 2015, to stand at €46.7 billion. On a quarterly basis, deposits from these sectors increased 2.4 per cent (€1.1 billion).

Deposits from eight of the fifteen non-financial sectors increased in Q2 2015 (Chart 10), with the property-related enterprises of real estate and construction recording the largest increases of €581 million and €338 million, respectively. The largest decrease during Q2 was in the information and communications sector.

Interestingly property-related sectors increased deposits over the quarter as well as increasing their share of new SME lending. In addition, SME net repayments were reduced, while real estate SMEs also experienced lower interest rates on new loans in Q2 2015.

Further information

Note 1:

The reporting population for interest rate statistics are those credit institutions with a significant level of lending or deposit business with households or non-financial corporates. All other SME statistics are collected from the full population of resident credit institutions. Although the interest rate data are collected from a sample of institutions and the coverage of the SME market is very high, gross new lending volumes underpinning the interest rates and volumes data will not match exactly. The reporting population is monitored under Regulation ECB/2014/30.

Extensive set of Business Credit and Deposits Statistics tables and detailed set of explanatory notes.

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¹ The extensive set of Business Credit and Deposits Statistics tables, along with a detailed set of explanatory notes are available here. Recent data are often provisional and may be subject to revision. See list of credit institutions resident in the Republic of Ireland (i.e. the population covered by these statistics).

² SMEs are defined as enterprises with fewer than 250 employees and whose annual turnover does not exceed €50 million and/or whose annual balance sheet does not exceed €43 million. This is the standard EU definition of an SME.

³ SME data includes lending to some enterprises in the financial intermediation sector, as their balance sheet size brings them into the SME category.

⁴ Gross new lending excludes restructures or renegotiations which do not increase the size of outstanding loans. It does include new funds drawn-down following a restructure or renegotiation of an existing facility that were not included in credit advanced at the end of the previous quarter.

⁵ See Note 1 on the compilation of SME interest rates.