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It turns out that the outlook for corporate borrowing won’t improve any further. Commercial real estate (ER) developers face particular challenges as demand has dropped significantly. There is also no shortage of pessimism about the housing market, as bank representatives pointed to notable price imbalances.
Unlike 2008
The survey was conducted in June (the quarantine was later lifted). The respondents are bank employees who hold positions of responsibility in loan units. The Bank of Lithuania asked them to answer how in 2020 the lending activity of banks changed in the second quarter and some questions sought to shed light on the expectations of bank representatives on credit standards and changes in the demand for loans over the next few three months.
According to representatives of the Bank of Lithuania, the results of the survey offer a general opinion of the respondents and do not necessarily reflect the official position and evaluations of the banks, as well as the Bank of Lithuania or its employees.
“The survey results show that several banks tightened credit standards and made loans more cautiously due to increased uncertainty due to the pandemic, but the situation is significantly different from the previous financial crisis, during which all banks tightened credit standards quickly, “said the Bank of Lithuania’s Macroprudential Analysis. economist Paulina Zlatkutė.
According to her, changes in credit conditions were also observed in the second quarter, in the middle of the COVID-19 pandemic, in 2020. In the second quarter, credit standards for businesses and households tightened. Four banks tightened the common standards for corporate lending, that is, one bank less than in 2020. In the first quarter, half of those surveyed tightened the standards for home loans, two banks more than in the previous quarter.
In the third quarter of this year, banks had no intention of changing standards for lending to households, and one bank promised to toughen standards for lending to businesses. During the period analyzed, the general conditions for granting loans to companies also tightened: a third of the respondents (three banks) indicated that they were stricter. In most cases, the size of the loan or line of credit was reduced, collateral requirements tightened, and the loan margin increased (although one bank indicated that it had reduced it). Two banks stated that the conditions for granting mortgage loans were stricter and more common: collateral requirements and other restrictions were generally tightened, but the margin was not increased, and one bank claimed that it had reduced it.
Half of companies feel limited
The Bank of Lithuania conducted another survey of companies. And he asked how the financing conditions provided by credit institutions had changed as a result of COVID-19. As in 2019, this year, half of the companies surveyed indicated that loan conditions to companies are currently fully or partially restricted. This is particularly the case for medium-sized and industrial, commercial and service companies (55%, 49%, 51% and 54% respectively).
According to the national central bank, a relatively stable number of rejected applications for new credit or changes in existing credit conditions for small and medium-sized companies shows a credit risk assessment similar to last year. On the other hand, the proportion of rejected applications in the large company segment increased to 19% this year. (14% per year). Rejection rates varied by activity. In the construction and services sectors, rejections fell 8% and 15% respectively during the year, while in the industrial and commercial sectors they increased 14% and 25% respectively. According to industrial companies, which use financial resources mainly for the purchase of equipment, credit institutions often did not motivate their negative decisions, and in the commercial sector, the assessment of the general economic situation was also a major reason for rejection.
According to entrepreneurs, credit institutions often do not motivate their negative decisions, and even half of the applicant banks do not give anything to explain.
According to a survey conducted by the Bank of Lithuania last year, the conditions of commercial loans in the country had already deteriorated significantly at that time. Almost half of the companies surveyed indicated that credit conditions were fully or partially restricted. According to entrepreneurs, credit institutions often do not motivate their negative decisions, and even half of the applicant banks offer nothing to explain.
Only agriculture and production are promising
According to the heads of the commercial banks’ lending divisions, although the economic situation deteriorated both in Lithuania and abroad, the financial situation of most companies had not been badly evaluated in June, only the evaluation of only hotels and restaurants deteriorated significantly. Companies with the fewest activities affected by the pandemic (agriculture, forestry, and manufacturing) were rated the most favorable, and overall, most companies were rated good or average.
When evaluating the state of the companies, the hotel and restaurant segment stood out, the majority stated that the state of these companies is bad or very bad (three and four banks, respectively). However, expectations about the condition of companies have deteriorated, with transportation, hotel and restaurant, construction, real estate and manufacturing companies receiving the most negative evaluations, and more than half of the banks reported conditions of deterioration. Most banks assessed the condition of households as an average, and three banks believe their condition will deteriorate.
More than half of banks reported seeing declining competition for loans for transportation, construction, hotels and restaurants, and real estate. Most financiers expect that loans to this business will also be less competitive in the third quarter of this year, but half of those surveyed (four banks) believe that competition for loans to agricultural and manufacturing companies will increase. A similar situation is observed due to the restriction of credit to some sectors – all banks restricted credit to hotels and restaurants, more than half – to real estate and transportation, and a third – to construction companies. The main reason for the restriction of loans was the deterioration of the general economic situation due to the COVID-19 pandemic.
Pessimism about NT
The survey revealed that with the onset of the pandemic, expectations of rising real estate prices have decreased significantly and the perception of imbalances in the commercial real estate market has increased. The biggest price drop is expected in the commercial real estate segment in the next few years: all banks have agreed that prices will fall and the vast majority expect a contraction of up to 10%. In the residential real estate market, expectations are lower due to old construction in the housing segment, but for both old and new construction, more than half of the banks (five) believe that prices do not they will fall or fall to 5 percent.
Five banks also reported imbalances in the real estate market, and in the commercial real estate segment, this share compared to 2019. in the fourth quarter, an increase of 40 percent. In the commercial real estate market, the demand imbalance is seen more often, and in the residential real estate market, the price level imbalance.
By the way, the information available to the Registry Center confirms the fears of the banks. During the eight months of this year, the number of real estate purchase and sale transactions registered in Lithuania amounted to 77.7 thousand. – 7.5 percent. less than last year at that time (83.9 thousand). This year, almost 20 thousand. apartment sales – 15 percent. less than in January-August of last year.
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