Economic conditions in the U.K. have improved noticeably over the last quarter of 2012, and going by the results of the Bank of England’s credit conditions survey of the country’s bank and non-bank lenders, the situation will only get better over the first quarter of this year.  The survey concluded that there was a significant increase in demand for home loans and credit card loans over Q4 2012 and also a small increase in demand for loans by mid-sized companies. And the trend is expected to continue in Q1 2013.
This is a good sign for the country’s biggest banks – RBS (NYSE:RBS), Barclays (NYSE:BCS) and HSBC (NYSE:HBC) – as they can expect a healthy growth in their loan portfolios over the coming quarters. The banks also stand to gain more from the British government’s Funding for Lending Scheme (FLS) which grants them access to cheap funding to fuel the expected increase in demand for loans.
We are in the process of updating our $9.50 price estimate for RBS’s stock to factor in the impact of its proposed privatization plan over the coming years.
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As is evident from the chart above, the growth in RBS’s consumer loans portfolio has been rather slow over the recent years owing to the slowdown in the Eurozone. But as the peripheral European economies limp towards stability on the back of assistance provided by the economically stronger nations in the region, the overall scenario appears to be slowly returning to normal.
A good indication of this fact is the Bank of England’s quarterly credit conditions survey which aims to understand the trends and developments in the U.K.’s credit conditions so that it can make policy decisions regarding the plan of action required in the future. The most recent survey reveals that there is a healthy increase in demand for various types of consumer loans in the country and that the banks are more than eager to meet that demand. No doubt, cheap access to funds for the banks through the government’s Funding for Lending Scheme (FLS) has a big role to play in the increase in supply of loans in the country. 
As far as the banks are concerned, this is good news on two fronts.
Firstly, the increase in demand for loans coupled with a lower default rate as reported by the survey would mean that the banks should see a faster increase in the size of outstanding loans without compromising on the quality of the loans. Secondly, they are likely to benefit from higher interest margins as funding for these loans comes cheap from the government – pushing up their yield figures too.
You can understand how an increase in the size of outstanding consumer loans helps RBS’s estimated share value by making changes to the chart above. You can also understand the impact of an increase in net interest yields on the share price by tweaking the chart below.Notes: