low interest rates

KfW says corporate loans are up but sounds alarm on why

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So many loans, so little time. Source: KfW

State-owned reconstruction bank KfW expects new loans to grow 10 percent in the third quarter over a year earlier as companies bulk up ahead of a looming downturn. The Bonn-based lender, formally known as the Kreditanstat für Wiederaufbau, said new loans to companies and the self-employed rose 8.3 percent in the second quarter but fears the money isn’t helping support growth.

The figures come from the bank’s credit market outlook, which only Handelsblatt has seen.

“The unexpectedly strong credit growth has less to do with an investment boom than with a stuttering economic engine, high uncertainty and corporate expectations that interest rates will rise again,” KfW Chief Economist Jörg Zeuner said.

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Economists had expected fewer loans as companies cut risk in the face of weakening economies. Instead, Mr. Zeuner now says the manufacturing sector may have overshot and companies are having to pay to maintain excess inventories, leading to the need for capital – in July, industrial production fell sharply, which would be plausible as a reaction to an inventory build-up.

However, the demand for new loans is coming from every sector with chemicals especially clamoring for cash as a number of major acquisitions are completed. Some companies may just be looking to exploit record low interest rates before they disappear.

Deutsche Bank, Germany’s biggest bank, said in a recent report it’s also observing “initial warning signals.” Companies investing in growth shop for five-year or longer loans, Deutsche said, but currently short-term loans are more in vogue. The taste for short-term loans has grown “out of concern for a cooling of the global economy due to the trade dispute between the United States and China, and the expected higher interest rates.”

The interest may also come from companies rediscovering their banking partners after earlier preferring to get money from investors. With economies booming, banks are now more willing to lend – so much so that Germany’s financial services regulator Bafin recently warned that banks may be becoming too lax.

For now, companies don’t think so.

Yasmin Osman covers the banking sector and regulation in Frankfurt for Handelsblatt. Norbert Häring is Handelsblatt’s lead economist in Frankfurt. To contact the authors: haering@handelsblatt.com,osman@handelsblatt.com

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