Emerging market bank lending conditions deteriorate in Q1-IIF

NEW YORK Thu May 1, 2014 2:44pm EDT

NEW YORK May 1 (Reuters) - Bank lending conditions in emerging markets worsened in the first quarter of 2014, reflecting a weakened economic environment in many of the world's developing regions, a new survey by the Institute of International Finance showed on Thursday.

In the January-March period, the IIF's composite index of Bank Lending Conditions Survey in emerging markets fell 1.2 points to 48.2. A reading below 50 reflects lending conditions are deteriorating.

The weak conditions observed in the first quarter have been in place for the last four quarters, IIF said.

Declining demand for loans was behind much of the first-quarter drop, the IIF noted, citing results from its survey of 125 banks based in emerging economies.

The survey also found a rising level of non-performing loans, which reflect late or non-payments on existing credit. This was a reversal from the improvement registered in its survey from the fourth quarter of last year and banks are now saying these NPL levels are expected to further deteriorate.

"The deterioration in bank lending conditions was led by (emerging markets in) Europe and Latin America. Lending conditions in EM Asia were tightened at the same pace as in the fourth quarter of 2013, while those in Africa and Middle East continued to ease," the IIF, a business association of the world's biggest financial institutions.

Across five major categories tracked by the IIF, demand for trade finance grew in the quarter, but not as robustly as in the last quarter of 2013. Conditions deteriorated in the other four categories: credit standards, non-performing loans, demand for loans and funding conditions.

Tightening standards for extending credit were seen across nearly all the major emerging market regions, especially in Europe for consumer loans. Conditions for loans in Asia continued to tighten albeit more moderately, while in the Middle East and North Africa (MENA) conditions actually managed to ease, but only by a slim margin.

As a result of more exacting standards for giving consumer and housing loans in Europe, overall loan demand declined. Demand for loans slowed in Sub-Saharan Africa, but continued to increase in the MENA region.

"Among loan categories, demand for corporate loans was well maintained, but demand for residential real estate dipped significantly and that for consumer loans slowed markedly," the IIF said.

International funding conditions maintained a steady but moderate pace of tightening, meaning the ability to raise capital was still not easy.

"In fact, EM Europe witnessed the most aggressive tightening in both domestic and external funding conditions compared to other regions," the survey said.

"The index for domestic funding conditions fell to 41.4, the lowest since the second quarter of 2012, while the index for external funding conditions reached 41.1, showing the most tightening since the fourth quarter of 2011 as geopolitical tensions in the region increased market volatility," the IIF said.

The survey was conducted between March 10 and April 7. (Reporting by Daniel Bases, editing by G Crosse)

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