Euro zone banks see rebound in loan demand as rates fall, ECB survey shows

FRANKFURT (Reuters) - Demand for bank loans across the 20-nation euro zone rose in the third quarter and a further increase is expected in the final three months of the year, with household mortgages driving the expansion, a European Central Bank survey showed on Tuesday.

Lending growth has been hovering just above zero all year as high interest rates and weak economic growth have pushed down demand, depressing prospects across a bloc that has been skirting a recession for years.

This weak growth is one of the main reasons why the ECB is almost certain to cut interest rates this week for the third time this year, arguing that inflation is now close to being tamed so it is time to ease up on the brakes.

"For the first time since the third quarter of 2022, banks reported a moderate net increase in demand from firms for loans or drawing of credit lines, while remaining weak overall," the ECB said in a quarterly survey of 156 large lenders. "Net demand for housing loans rebounded strongly."

Lower interest rates drove corporate loan demand but investments had little impact, the ECB said. In the case of household customers, the rise in demand was driven by declining interest rates and improving housing market prospects.

In the current quarter, banks see a further rise in net demand across all loan segments, especially for housing loans.

Rate cuts are not an obvious boon to lenders, however, since they compress lending margins, and banks reported the first negative impact from ECB policy on their margins since the end of 2022.

"Banks expect the negative net impact on margins associated with ECB rate policy to deepen and to result in a decline in overall profitability from the high levels reached during the 2022-2023 tightening cycle," the ECB said.

Credit standards, or banks' loan approval criteria, remained unchanged for corporate customers after more than two years of consecutive tightening but further tightening was seen for the current quarter.

In the case of mortgages, credit standards eased and banks saw further easing ahead.

(Reporting by Balazs Koranyi; Editing by Christina Fincher)