Why EU Bank Shares Slump While Corporate Lending Jumps

The European Central Bank (ECB) released new figures on corporate lending, and the results are promising — though, reports say, they’re positive for borrowers, but not investors.

According to the ECB, corporate lending by banks increased by 1.9 percent in the 12 months to July, reports by The Wall Street Journal said on Friday (Aug. 26). That’s despite a slump in stock prices among European banks, reports added, and a bit of an anomaly, considering that share prices usually fluctuate along with lending volume.

New lows hit the Euro Stoxx Banks index, narrowly avoiding mid-2012 levels that were set in the heat of the European financial crisis. The index remains significantly below levels seen at the end of last year, reports added.

The publication said the connection between stock prices and bank lending is due to the ability for banks to raise capital to lend out, which becomes more difficult when share prices are down. Analysts, though, are considering a few reasons why the link between stock prices and lending won’t continue.

At present, low share prices could be due to low expectations for profits among the EU’s banks. Research released by Deutsche Bank last week concluded that “the sector performance predominantly reflects earnings trends rather than a valuation de-rating,” as pointed out by WSJ.

Further, analysts said, a lack of a recession and a stronger economy could be boosting lending volumes, despite share prices remaining depressed.

Reports also noted that corporate lending volumes aren’t necessarily high across the entire eurozone.

“This year, annual growth in lending to firms has been on an upward trend in Germany and France,” explained Jack Allen, European economist at Capital Economics, in an interview with the publication. “But in recent months, the contraction in lending to firms in Italy has accelerated.”