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Financial institutions toughen loan conditions
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Notable increase in loan interest rates in real terms.
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The upward move in loan interest rates continues, driven by progressive removal of easy money policies by the European Central Bank. The average interest rate on loans and credits granted to companies and households stood at 5.43% in April, an increase of 109 basis points in the past 12 months. The 1-year Euribor rose to 4.37% in May, an increase of 236 basis points compared with the low in June 2003. No doubt this reference index will continue to rise in June, discounting further increases in the Eurosystem interest rate. In addition, given that the annual inflation rate has dropped in recent months, the 1-year Euribor has risen even more in real terms.
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In this environment of rising real interest rates, funding granted to the private sector continued to ease in April. In any case, the good state of the economy continues to stimulate demand for credit from the private sector, so that the growth rate is nearly twice that for the euro area as a whole. In fact, funding granted to companies and households rose by 20.5% in April compared with the same month last year, a rate 3.7% lower than that recorded in December 2006.
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Mergers and restructuring of companies and investments continue to raise demand for corporate funding.
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Funding going to non-financial companies slowed more than that granted to households although it still shows a high growth rate. Funding granted to non-financial companies rose by 22.8% over the past 12 months ended April, 5.1 points more than in December. In any case, demand for credit from companies remains high. A number of factors have contributed to the strength of this demand, on the one hand, the reason is investment. Leasing showed an increase of 15.8% in past 12 months. In addition, commercial credit (used to finance working capital) rose by 6.9% in the same period. Also playing part was demand for funding for mergers and company restructuring.
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Housing loans slow down more than other funding granted to households.
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Financial resources granted to individuals continue to ease growth to the point where it marked up an annual change rate of 17.6% in April. This drop was mainly due to the trend in housing loans. These loans rose at an annual rate of 18.1% at the end of the first four months, down 6 points from the figure recorded at the beginning of 2006. The increase in real estate prices also contributed to ease demand for mortgage loans. Loans for other purposes showed a much smaller drop in recent months, although the growth rate of 16.3% is lower that the figure for mortgage loans.
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Financial institutions toughen access to loans and borrowing conditions in spite of low default rate.
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The default rate for loans to the private sector as a whole stood at 0.76% in April, practically the same level as in the previous three months and only 4 decimals above the all-time low recorded in December 2006. Nevertheless, the financial institutions are not letting down their guard. At least, the «Survey of Bank Loans in Spain» for April 2007 issued by the Bank of Spain shows that the financial institutions toughened their loan conditions slightly. In the first quarter, margins of financial institutions rose and expenses increased, along with securities and commitments. At the same time, the maximum amount lent was down, as well as maturity term. Criteria for approval of home-purchase loans were also substantially toughened, as well as conditions applied to new borrowers, although the maturity term continued to lengthen slightly. Financial institutions also tightened conditions applying to consumer loans and those for other purposes.
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Higher wages boost growth of time deposits.
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In the second quarter, Spanish financial institutions foresee a tightening in criteria for access to long-term corporate credit. Similarly, the toughening of criteria for household financing is expected to continue both for housing and other purposes. As a result, it can be seen that supply factors are also contributing to the current slowdown in credit to the private sector.
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Sharp growth in bank deposits
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Net sales of mutual fund participations in January-May period...
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Bank deposits of households and companies continue to grow at a fast rate. The change rate in the last 12 months ended April was higher than for credits. In absolute terms, however, the increase in deposits continues to be insufficient to finance the high level of loans granted. As a result, financial institutions have largely been obliged to issues bonds to cover this gap in their balance sheets.
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The heading to show the biggest increase in the past year was deposits in foreign currency, which benefited from the differences in interest rates in their favour, although the total balance is relatively low. Time deposits also rose notably, by 39.2% in the case of a 2-year term. This big increase may be explained by the higher interest rates now being paid on such deposits. Average return on time deposits stood at 3.60% in April as against 0.60% for on-demand accounts and savings accounts.
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...in spite of annual yield of 7.4% and positive real return over very long term.
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As a result, bank deposits are providing tough competition to other financial products such as participations in mutual funds. Assets of mutual funds rose by 3.3% in the past 12 months ending in May going to 261.03 billion euros, in spite of an average yield of 7.4% in the past 12 months. In fact, in the first five months of the year there were net withdrawals from mutual funds of 339 million euros. The biggest net sales in mutual fund participations in the January-May period took place in guaranteed share-based funds and short-term bond-based funds. On the other hand, there were notable net flows toward guaranteed bond-based funds and European share-based funds.
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Hedge funds attract 196 million euros and 300 participants in early stages of showing face in Spanish market.
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The yield obtained on mutual funds in the past year ended May showed a high yield in real terms as a result of the decrease in inflation. The medium-term yield on mutual funds was also above inflation. While over 10 years it is true that average inflation has been slightly higher than the average yield on mutual funds, over the longer term (say, 16 years) the yield on mutual funds works out clearly above inflation. As a result, it is maintained that, while the yield on mutual funds fluctuates according to underlying assets (both bonds and shares), with the trend being affected by some volatility, over the long term the real yield is positive.
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On the other hand, hedge funds, which are characterized by greater freedom in investment strategies and the possibility of higher returns (while involving greater risk), for some time now have begun to show their face in the Spanish market. According to figures supplied by Inverco, the association of fund managers, the money attracted by hedge funds had risen to 196 million euros at the end of May 2007. At that date, total participants numbered 300.
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