Euro zone banks see loan demand rising sharply after ECB boost

FRANKFURT (Reuters) - Euro zone banks expect the strongest demand for loans in more than a decade in coming months as the European Central Bank's bond-buying program improves funding conditions, an ECB survey showed on Tuesday.

The ECB's quarterly Bank Lending Survey, which polls more than 140 top banks, showed that lending standards were also gradually being loosened. The process was expected to remain slow, although there are bright spots, such as Italy.

The results are the clearest sign yet that the euro zone's credit cycle is improving after years of anemic lending. Combined with recent improvement in economic data , they provide an encouraging outlook for the region.

A net 39 percent of banks -- the highest since the ECB started collecting the data in 2003 -- foresee stronger demand for loans from companies in the coming three months. Twenty-nine 29 percent expected it to rise for house purchases.

"There have been substantial improvements in the level of credit standards compared with banks' indications one year ago," the ECB said in its report.

The figures also showed banks were making it easier to borrow. On balance, 9 percent eased lending terms over the last quarter and 1 percent expected then to be loosened them in the coming three months.

Of the big euro zone countries, Italy saw the biggest improvement, with a net 25 percent of its banks loosening lending standards over the last three months. A net 13 percent eased standards in the Netherlands and 7 percent in France.

Indications were that the ECB's 1 trillion-euro stimulus program, which was announced in January and began last month, is starting to have an effect.

Nearly half the banks reported the quantitative easing program had helped to improve market financing conditions, and they expected to use some of the money being injected into the banking system to provide loans.

But many said it was likely to hurt their profits by reducing their margins on loans.

"It's an improvement but from a very low base," said Jack Allen of consultancy Capital Economics. "Banks' willingness to lend has been loosening but that's after about six years of tightening standards. The euro zone is so much further behind than the U.S."

(To read the full report click on: http://www.ecb.europa.eu/stats/pdf/blssurvey_201504.pdf?b2fee9a73ec3fa30...)

(The story was refiled to fix a typographical error in the sixth paragraph.)

(Additional reporting by John O'Donnell; Editing by Andrew Heavens, Larry King)