04/07/2011: New Deposits in Irish Banking

Over two previous posts I examined the data for new business loans rates for households (here) and non-financial corporations (here and spreads here). This post covers the deposits – both household and corporate.

Here is what the data on new deposits telling us:

• Rates for household deposits with agreed maturity have fallen significantly between March 2011 (1.93%) and April 2011 (1.81%). The rates are now below those for the historical average of 2.366% and crisis period average (January 2008-present) of 2.394%. 12mo MA is 1.707%. The volatility of the rates has risen during the crisis from standard deviation for historical period being 0.950 to crisis period standard deviation of 1.155.
• At the same time, new deposits volumes have contracted sharply for households from €12,333 million in March 2011 to €7,873 million in April 2011. Historical monthly average is €12,636 million and crisis period average is €12,938 million with 12mo MA at €10,079 million. April level of new deposits is the lowest since January 2003 – the start of the series.
• Rates for non-financial corporations’ deposits with agreed maturity have risen from 1.41% in February and March to 1.52% in April, standing still below the historical average of 2.336% and crisis period average of 2.125%, but well ahead of the 12mo MA of 1.293%. The volatility of these rates has risen sharply during the crisis to a standard deviation of 1.319 from historical standard deviation of 1.036.
• Volumes of corporate deposits with agreed maturity have declined from €6,720 million in March 2011 to €5,170 million in April 2011. These levels compare extremely poorly against historical average of €13,739 million, the crisis period average of €11,593 million and 12mo MA of €7,277 million.
  

Lastly, consider the spreads between deposit rates available to the households and those available to corporate clients. Keep in mind that from funding perspective, households deposits are probably less volatile than corporate deposits. Note that standard deviations for the two types of deposits by volume were: historical 3,000.8 million for households against 4,198.09 million for corporates and this relationship remains relatively stable for the period of the crisis.

So the spread on deposit rates for households over and above corporate deposit rates has narrowed to 0.29 percentage points in April from 0.52 pp in March 2011. Historical average spread was 0.03 pp and crisis period average is 0.269 pp while 12mo MA spread is 0.413 pp.

04/07/2011: Irish property prices - daft.ie report

My comment and rather back-of-the-envelope outlook for Irish property markets is available with daft.ie report - link here. Note that the prediction concerning rents-prices feedback is based on my earlier analysis published here - see the last chart.

Strangely, at least in one instance my opening paragraphs were identified by some commentators as being a 'political statement'. To all who know my work, this should sound like a mistake for two reasons:

1. I have never taken partisan political positions. While I do hold strong policy views, these are not aligned with any political party or movement. I have consistently provided advice to and public engagement with any political party or movement that asked for such. During the last election, as in the previous elections, I did not support any particular party, although I did support / help a number of individual candidates whose views span left and right of the political spectrum and with whose views I was not necessarily in full agreement.
   
2. The entire opinion piece is based on my understanding of economic facts. I have spoken on many occasions about the adverse effects of increased taxation on investment and household spending. I have been vocal about the mirage of 'foreign investors flocking to Ireland' stories being pulled out of thin air by our real estate journalists. Over a number of years, I have been critical of the state policy of promoting - via pricing systems and lack of regulatory independence - inflation in state-controlled services. Nothing political here.

04.07/2011: Eurocoin for June 2011

In advance of ECB decision and with a week delay - here's the latest leading indicator for Euro area growth - eurocoin - as issued by CEPR (link to release here).
As shown above, eurocoin posted a small decline from 0.62 in May to 0.52 in June. This reading is below 3mo MA of 0.57 and behind 6mo MA of 0.56, but is 13% ahead of the June 2010 reading of 0.46. The series continue to signal expansion, albeit at a slower pace.

Mapping out eurocoin alongside quarterly growth rates suggests, should eurocoin lower trend be established in July-August - slower growth in Q2/Q3 2011:

Lastly, a chart mapping eurocoin against ECB decisions:
The above suggests that although eurocoin signals alleviation in the pressures on ECB to raise rates this month, there is, nonetheless continued disconnect between the historical rates and eurocoin readings. Historical relationship between level and changes in eurocoin and ECB repo rate implies repo rate around 2.0-2.5% or roughly double current rate.

03/07/2011: SMEs and Corporate Credit: April 2011 data

In the previous post I looked at the latest data on lending rates and volumes for Irish households, which, among other things, showed

• lack of any significant easing in rates themselves (except for consumer credit), and
• lack of any uptick in credit issuance (in fact, there has been contraction in lending volumes in 3 out of 4 categories examined)

Here, let's take a look at business lending. First, loans up to € 1 million in volume (primarily loans that are focused on SMEs). Keep in mind the objectives of:

• creating Nama
• pumping countless billions into IRL-6 zombies
• setting aside specially designated funds within AIB & BofI for small business lending, and
• increasing various seed programmes (EI) and targeted tax reliefs

were to increase supply of credit to Irish SMEs.

Top line numbers for loans under €1 million are:

• Average rates charged on loans under €1 million in volume with up to 1 year fixed duration (or floating) has risen from 4.27% t0 4.74% between March 2011 and April 2011. The rate now stands just-shy of 4.906% historical average and 4.801 average for crisis period of January-2008 through present. 12mo MA is now below April 2011 rate at 4.087%. Volatility of these rates has risen from 1.002 standard deviation for historical period to 1.302 standard deviation for the crisis period. In short, there are no signs of any improvement in the rates charged during the crisis.
• At the same time, volume of non-financial corporate loans under €1 million with floating or up to 1 year fixed rates has fallen from €404 million in March to €250 million in April 2011. Volumes of new loans written in this category now stand well below historical monthly average of €919 million, crisis period average of €832 million and 12mo MA of €448.4 million.
• Fixed-rate loans (with rate fixed for more than 1 year) also became more expensive in April (6.17%) than in March (5.86%). These are now well above the historical average rates of 5.234%, the crisis average of 5.329% and the 12mo MA of 5.008%. Volatility of these rates also rose during the crisis.
• Volumes of over 1 year fixed smaller loans has shrunk to €45 million in April, down from €64 million in March and down on historical average of €160 million, crisis period average of €110 million and 12mo MA of €70.25 million.
  

So to sum this up, small businesses are seeing higher charges and shrinking volumes of loans across both types of loans under €1 million in volume. Anyone wondering why the hell all the above measures are failing to deliver on the promise?

But wait, what about larger loans? Next, consider loans issued to non-financial corporations that are over €1 million in volume:

• Rates charged on loans of €1 million and more that are floating or under 1 year fixed have fallen from 3.51% in March to 3.22% in April and are now standing well below 4.407% historical average, 4.01% crisis period average, but above 12mo MA of 3.048%. Volatility of these loans rates have risen during the crisis from historical 1.159 standard deviation to a standard deviation of 1.518 during the crisis.
• So more of those loans should be pursued by businesses, you'd think? Not really. At least not when it comes to actual issuance of these loans. Volume of larger loans issued on floating or fixed up to 1 year rate basis has fallen in April to €626 million, down from €1,119 million in March. Both numbers pale in comparison with historical average of €3,948 million and crisis period average of €4,654 million and both are below 12mo MA of €1,784 million.
• Rates charged on loans of €1 million and more in volume with fixed interest rate over 1 year have also declined from 2.30% in March to 2.27% in April. The rates are now well below 4.054% average over historical period and 3.666% average over crisis period. 12mo MA is also higher than the current rates - at 2.772%. Lower rates here again come with higher volatility.
  
• Volumes of these loans, however, fell precipitously, reaching €45 million in April, down from €169 million in March. Historical monthly average of new loans of this type issued stands at €632.3 million, while crisis period average is €488.5 million and 12mo MA is €190 million.

Lastly, let's take a look at the spreads between the rates based on loan volume:

• Spreads on corporate loans under €1 million, flexible rate & under 1 year fixed over and above those for over €1 million, should - in theory - be negative, unless there is a selection bias of SMEs predominantly taking smaller loans. At any rate, we would expect the spread to be moving in the direction of lower spreads if Government 'get credit flowing to SMEs' policies were working. Alas, in April 2011, the spread stood at 1.52pp up from March 0.76 percentage points and well above the historical average of 0.499pp and crisis period average of 0.791pp. It was also above 12mo MA reading of 1.039pp. Spread volatility has declined marginally during the crisis. So no, Government policy does not help selecting in favor of smaller corporate borrowers and does not provide support for working capital lending.
  
• Spreads on corporate loans under €1 million with fixed rate (>1 year duration) over and above similar loans of volume in excess of €1 million stood at 3.9pp in April up from 3.56pp in March. The spread is now massively above historical average of 1.180pp and crisis period average of 1.663pp, as well as 12mo MA of 2.237pp. Spread volatility has risen during the crisis. Again, no evidence here that SMEs are getting any support from Government policy 'instruments' listed above when it comes to gaining smaller loans as opposed to larger corporates access to credit.

03/07/2011: Household Credit: latest data

Some more analysis of new lending - based on CBofI data through April 2011.

Household loans and consumer loans are covered in this post. So house purchase loans first:

• Rates for the loans for House Purchases floating and up to 1 year fixation have risen from 3.09% to 3.20% in April 2011, relative to March. Historical average rate is 3.743% and the average rate since the beginning of the crisis (January 2008) is 3.574%. Current rates are above their 12mo MA of 2.959%. It is interesting to note that this data clearly shows that there is no statistically significant easing of rates during the crisis as crisis period average rates are not statistically significantly different from those for the entire history of the data series. Another interesting point is that when house purchasers are concerned, volatility of retail rates has risen during the crisis: the historical standard deviation of the series is 0.827 while post-January 2008 standard deviation is 1.072.
• Volumes of loans in the above category has declined from €1.190 billion issued in March 2011 to €1.092 billion in April 2011. Again, current rates of issuance are signaling continued credit tightening: historical monthly average issuance stands at €2.577 billion, while issuance since January 2008 averages €2.0 billion.
  
• Rates for the loans for House Purchases, over 1 year fixation have also increased mom in April from 4.23% to 4.29%. The rates are now above their historical average of 4.213% but below their crisis period average of 4.34%. April rate is above 12mo MA of 4.115%. As in the case of floating rate loans, fixed rate loans rates also risen in volatility during the crisis with overall historical standard deviation for the rates at 0.641 and January 2008-present standard deviation of 0.723.
• However, good luck to anyone trying to get these loans. Fixed rate loans for House Purchases issuance fell from €568 million in March to €331 million in April. New issuance of these loans is now well below historical average monthly volumes of €705 million and below crisis-period average of €521 million. Although 12mo MA is above the crisis average at €526 million.

A chart:
But what about consumer loans not designated for house purchases?

• Cost of consumer credit for floating loans and loans up to 1 year fixation fell from 6.02% in March 2011 to 5.23% in April. Thus, April rates were below their historical monthly average of 5.584%, their crisis period average of 5.565% and their 12mo MA of 5.640%. Note that crisis period was associated with higher volatility of rates in this category as well, with standard deviation rising from historical 0.836 to crisis-period 1.099.
• In terms of volumes of loans issued in the above category, the volume increased from €134 million to €156 million between March 2011 and April. However, volume of new loans issuance remains well below its historical average of €393 million, crisis-period average of €378 million and 12mo MA of €193 million.
• Cost of consumer credit for fixed loans (over 1 year) has fallen from 10.09% in March to 9.90% in April 2011, with current rate still above historical average of 8.589% and crisis period average of 9.494%, but is now below 12mo MA of 10.217%. Interestingly, volatility of rates charged on these types of loans has fallen from historical standard deviation of 0.962 to crisis-period standard deviation of 0.695.
• Again, good luck securing such loans, though, as volumes issued declined from €60 million in March 2011 to €51 million in April. Historical average issuance stands at €169.5 million, while crisis period average is €96 million. Current issuance however remains above 12mo MA of €48.8 million.

A chart to illustrate:

02/07/2011: SMEs and smaller corproate loans rates

An interesting chart of rates charged on new business loans across SMEs and households - my calculations based on Table B.2.1 from the Central Bank database:
In April 2011, the spread between Non-Financial Corporate Loans volume under €1 mln over those for house purchases were:

• Floating rate and up to 1 year fixation corporate loans v similar house purchase loans: 1.54 percentage points, up from 1.18 in March and well above the historical average spread of 1.16 percentage points. Historical average spread for the period January 2008-present is 1.23 percentage points. April 2011 new business rate spread is the highest since January 2009.
• Over 1 year fixation rates spread stood at 1.88 percentage points in April, up on 1.63 percentage points in March 2011. Historical average is 1.02 percentage points and average spread for the period since January 2008 is 0.99 percentage points.

Hence, overall, setting aside the pesky issue that very little new credit is issued by the banks, current credit conditions are clearly pricing historical highs in terms of risk premium for smaller corporate loans. For businesses operating in Ireland, the credit crunch is only getting crunchier, it seems.