01/04/2022 10:10 AM

Lending to non-financial corporations: the current trends

Just one year ago, lending to business went through a difficult period. The microfinancing (MFI) loan portfolio to private non-financial corporations dropped by 11% over the year, and decline was observed in almost all business industries.

Recently, the Bank of Lithuania published new data related to lending to business entities. It is important to understand how the situation has altered, what the recent trends are and which factors led to changes in the value of the loan portfolio.

MFIs lending to business entities moves upwards, but not in all industries

According to the Bank of Lithuania, MFIs loan portfolio to private non-financial corporations amounted to EUR 8,00 billion at the end of Q3 2021, i.e. 1.1% more than a year ago. Overall, the portfolio’s value has been steadily increasing since Q1 2021 and compared to its minimum value fixed in February 2021, lending volumes climbed by 16%.

However, the data show that growth in lending is taking place only in several industries, so the growing trends should not be interpreted as a full lending market recovery. The figures reveal that the impact of individual business sectors on the overall growth is uneven, so let’s take a further look at which sectors contributed the most and why.

Changes in the loan portfolio are significantly influenced by the real estate development companies

According to the Bank of Lithuania, loans granted to companies engaged in real estate development activities have increased by EUR 230.2 million over the year which was the largest annual change compared with other business industries. The importance of this sector is relatively large as it covers 30% of the business loans portfolio, therefore, its fluctuations also tend to be significant.

The main reasons for such positive changes are mainly related to the sizzling real estate market in Lithuania. Rapidly rising household incomes, low interest rates on mortgages and fears of inflation are boosting demand for new and more expensive apartments, prompting real estate developers to borrow and invest in new projects. The rapid rise in real estate prices and the fastest growing mortgage portfolio in the EU is a good example of this.

Manufacturing companies are also among the most active borrowers

Lending to manufacturing companies is on the rise, but not showing as swift a recovery when compared with real estate developers. During the year, loans to manufacturing companies moved up by EUR 41 million. Loans to enterprises engaged in this activity account for 14% of the total loan portfolio granted to private non-financial corporations and, according to this indicator, are inferior only to the real estate and trade sectors.

For a long time, lending to manufacturing companies decreased, but the trend began to change at the beginning of 2021. This was caused by several reasons. The first being COVID-19 and its impact on both external and internal markets. The economic slowdown during the pandemic had a negative impact on the volume of activities of Lithuanian manufacturing companies. Subsequently, the scale of the pandemic declined and demand for goods recovered. Rising optimism and a growing willingness to invest can also be identified as drivers of money demand in the manufacturing area.

The worst performer was the trade industry

A year ago, trade companies were also among the most active borrowers, but now the trends have changed significantly. In Q3 2020 – Q3 2021 loans to such companies shrunk by EUR 174 million. Loans to trade companies account for almost 17% of the total corporate loan portfolio, so this trend is not a good sign for the loan market.

However, it is necessary to note that Lithuanian credit market is relatively small, therefore, several large loans may change the direction of the loan portfolio substantially. Significant depreciation of loans to trade companies was observed in Q4 2020, and the situation stabilised in the following quarters. Against this background, the decline in loans to trade companies should not be seen as a lack of willingness to lend or borrow. It is very likely that such a sharp decline was caused just by the repayment of several large loans.

Currently, it seems that the new wave of COVID-19 cases is coming, so it will be interesting to see how the loan market meets this challenge.