OREANDA-NEWS. The ECB's Targeted Long-Term Refinancing Operations (TLTRO) are failing to provide the intended stimulus to EU bank loan growth although they are helping to reverse the loan contraction that began in 2012, says Fitch Ratings. A total of EUR400bn of TLTROs have been issued since their launch in September 2014, but the stock of lending to eurozone non-financial corporations has remained flat over the past year.

Eurozone banks initially borrowed heavily under the TLTRO auctions but used the funds primarily to repay maturing three-year LTRO borrowings taken out in 2011 and 2012. Italian and Spanish banks were the heaviest initial borrowers under the TLTROs, taking up around two-thirds of the first allotments. But TLTRO borrowing currently represents between 4% and 5% of total bank sector funding in Portugal, Spain, Italy and Greece, which we view as modest.

Northern European banks have been more effective in injecting TLTRO funding into new corporate lending compared with southern European peers, despite lower take-up, in our opinion.

This is largely because credit demand is picking up in these countries and because the benchmark mechanism bound TLTRO utilisation to new loan issuances from September 2014 while for most banks in southern Europe which had been deleveraging only from April 2015. In the first eight months of 2015, bank loans to non-financial corporations grew in France (up 1.9%), Netherlands (up 1.2%) and Germany (up 1.4%). The opposite is true for Southern European banks where loans are contracting in Spain (down 3.9%), Italy (down 0.7%), Portugal (down 1.9%) and Greece (down 5.9%).

Fitch's baseline GDP growth forecast for the eurozone is 1.6% in 2015-2017. We expect eurozone bank lending to improve in the coming months, mostly driven by more favourable economic prospects, which should translate into stronger loan demand and more opportunities for banks to expand lending without compromising asset quality.

Despite stronger growth prospects, loan demand is still far from robust and take-up of forthcoming TLTRO issues is likely to be modest. This is also because eurozone banks generally hold ample liquidity buffers, meaning that the TLTRO's impact on lending, while positive, will remain limited. This is explored in greater detail in the report, 'ECB TLTROs: Lending Stimulus Yet to Materialise', available by clicking on the link below.