Lloyds Banking Group Plc (LLOY) and Banco Santander SA (SAN) led a drop in U.K. lending in the fourth quarter as the Bank of England said its credit-boosting program will “take time” to feed through to loan growth.
The flow of net lending shrank 2.4 billion pounds ($3.6 billion), leaving the total down 1.5 billion pounds since June, the central bank said in a report on its Funding for Lending Scheme. Net loans at Lloyds plunged 3.1 billion pounds. A separate report showed U.K. construction shrank at the fastest pace in more than three years in February.
BOE policy makers meeting this week have said they are considering new measures to revive growth as the economy shows signs of slipping into an unprecedented triple-dip recession. Markets Director Paul Fisher said last week the FLS had been “remarkably successful” in reducing bank funding costs, though its impact on loan rates had been slower.
“It is pretty clear that the FLS is not living up to expectations,” said Michael Saunders, chief western Europe economist at Citigroup Inc. in London. “While mortgage lending spreads have fallen, lending is weak and credit availability for business is poor.”
In a statement, the BOE said there are “indications of an improvement” in credit conditions, “but it will take time for this to feed through to lending volumes, given the typical lags involved.”
Banks are cutting lending as they shrink their balance sheets and bolster capital to meet tougher global regulations in the wake of the financial crisiss.
Lloyds said the drop recorded in the BOE data is mostly due to a reduction in “non-core business” and that it grew net lending to borrowers such as smaller companies last year.
After Lloyds, the biggest drop was a 2.8 billion-pound decline at Santander, followed by RBS, at 1.7 billion pounds.
“To meet our strategic goals of balancing the business and supporting U.K. SMEs, we are reducing the size of our residential mortgage book, which because of our building society heritage, accounts for over 80 percent of our customer lending,” Santander said. It increased net lending to small businesses by 18 percent last year, it added.
In its response to the data, RBS said its “core bank increased net lending to the real economy by over 1 billion pounds.”
Barclays Plc (BARC) led banks increasing loans in the fourth quarter, with a 1.9 billion-pound expansion. It was followed by Nationwide Building Society, at 1.8 billion pounds.
“The figures continue to reflect the difficulty that small firms experience in getting finance,” said John Walker, chairman of the Federation of Small Businesses. “It is clear that Funding for Lending is benefitting the mortgage market more than the small business sector.”
The construction index from Markit Economics fell to 46.8 last month from 48.7 in January. That’s the lowest since October 2009 and below economists’ forecast for a reading of 49, based on the median of nine estimates.
A survey by Markit last week showed manufacturing unexpectedly shrank in February, reviving concerns the economy could shrink again this quarter. Services growth probably slowed last month, economists said before another report tomorrow.
The Bank of England and the U.K. Treasury started the FLS on Aug. 1 to specifically target lending to consumers and companies. Under the program, the BOE lends banks treasury bills that they can then use to access cheaper funding. Aggregate drawdowns by banks from the program were 9.5 billion pounds in the fourth quarter, pushing the total to 13.8 billion pounds since it began.
The British Chambers of Commerce said that while the fourth quarter is “typically a subdued period for lending,” the latest data are “clearly disappointing.”
Fisher said Feb. 27 that while the FLS has been “remarkably successful” in reducing bank funding costs, the impact on loan rates has been slower. He also said it may take until 2013 data to see the full impact on loan growth.
“Even though lending rates have fallen, that is still quite early for much extra money to have flowed from the application stage into actual loans,” Fisher said.
BOE policy makers begin their monthly two-day meeting on March 6 and will keep their bond-purchase target unchanged, according to the median of 39 economists in a Bloomberg survey. Eleven economists in the poll predict an expansion of quantitative easing.
In Asia today, Haruhiko Kuroda said the Bank of Japan (8301) will do whatever is needed to end 15 years of deflation should he be confirmed as governor and indicated that open-ended asset purchases could start sooner than next year.
“I would like to make my stance clear that we will do whatever we can do,” Kuroda, president of the Asian Development Bank, said at a confirmation hearing in the parliament in Tokyo. The central bank hasn’t bought enough assets and should consider buying large amounts of longer-term bonds, he said.
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