EY Eurozone forecast: Winter 2013/14
Outlook for financial services
Welcome to the Winter 2013/14 edition of the EY Eurozone Forecast: Outlook for Financial Services
“The run-up to Christmas and the start of 2014 proved to be a busy time for Europe's financial sector. Sadly this was less to do with the festivities and more to do with the necessary groundwork to underpin the Eurozone's new regulatory framework.”Andy Baldwin
EMEIA FSO Managing Partner
Read Andy's Forecast Overview here
The fragile pace of Eurozone recovery coupled with regulatory pressures is creating a challenging environment and holding back meaningful growth for financial services in 2014.
- Banking Forecast
Banks have reduced the size of their balance sheets, making them 5% smaller in 2013 than 2012, and lending is beginning to improve. Mortgage lending is an area of comparative strength with the stock of mortgages reaching a record €3.9t in 2014, whereas business and consumer lending will experience more modest growth. The ECB’s AQR will also put new demands on banks to raise capital in 2014 and non-performing loans remain high.
- Insurance Forecast
Insurance profits are expected to increase by 61% in 2013-17, but by 2017 will still remain 1/3 lower than their 2007 peak. Both life and general insurance premiums are forecast to grow between 2014-17 (by 3.3% and 2.4% per year respectively) but high levels of unemployment across the Eurozone will continue to limit insurance prospects. Regulatory resolution has been reached on Solvency II but the near-term effects are expected to be muted.
- Asset management forecast
Eurozone AUMs are forecast to pass €5t for the first time this year. Property funds are expected to benefit from improved risk appetite, increasing 14% between 2014-17. Equity and multi-asset funds are also forecast to increase significantly in 2012-17, by 70% and 82% respectively. However, fund of hedge fund AUMs continue to fall and are expected to now have less than a quarter of the assets they had at the end of 2007.
What do these, and other Eurozone developments mean for your financial services organization and the wider industry? Read our Winter 2013 forecast to find out more, or contact us for in depth insight on the issues affecting your organization.
Sector Highlights: Hover over, click an image below to learn more.
Banks have reduced the size of their balance sheets. We now estimate they were 5% smaller at the end of 2013 than at the end of 2012.
Life premiums across the Eurozone are forecast to rise above $600b in 2014 for the first time since 2008, to reach $625b.
Banking sector highlights
- Banks have reduced the size of their balance sheets. We now estimate they were 5% smaller at the end of 2013 than at the end of 2012.
- On average across the Eurozone, non-performing loans (NPLs) increased to 8% of total loans and will remain elevated in 2014 given weak economic growth and stable unemployment.
- Mortgage lending is an area of comparative strength. The stock of mortgages is forecast to rise by 1.1% to a record €3.9t in 2014 across the Eurozone.
- As the economy heals, banks should start increasing lending to businesses again, while other types of lending remain weaker. We expect modest 1.6% growth in business lending in 2014.
- The ECB's AQR is still the industry’s main challenge. Industry commentators estimate that Eurozone banks may need to raise anything from $20b–$200b of net new capital.
“The Eurozone’s banks may be entering uncharted waters, but they are far from powerless to prepare themselves.”Robert Cubbage
EMEIA Banking & Capital Markets Leader
Download full forecast×
Insurance sector highlights
- Life premiums across the Eurozone are forecast to rise above their 2008 peak for the first time in 2014.
- The gradual recovery in the economy and housing markets will lead to modest growth in general insurance business.
- Premiums are forecast to rise by 2.4% a year on average in 2014–17.
- However, we expect the high level of unemployment — averaging 19.3m in 2014 — to make policyholders very price sensitive, limiting insurance prospects.
- We forecast insurance profits to increase by 61% in 2013–17, reaching €46b in 2017, boosted by recovery in equity markets. This still remains one-third lower than the 2007 peak in profits.
- Near-term effects of Solvency II are likely to be muted, but some regulatory uncertainty remains.
“The conclusion of Omnibus II negotiations and agreement on an implementation timeline has pushed Solvency II back to the top of the industry’s agenda.”Andreas Freiling
EMEIA Insurance Leader
Download full forecast×
Asset management sector highlights
- We estimate that Eurozone assets under management (AUMs) increased by 6.9% in 2013 to €4,853b. In 2014, AUMs are forecast to rise above €5t for the first time.
- As risk appetite stabilizes and investors look beyond traditional asset classes, property funds are expected to grow by 14% between 2014 and 2017.
- AUMs in pan-Eurozone equity funds are forecast to reach €2,287b by 2017, an increase of 70% from 2012.
- Multi-asset funds are set to outperform other asset classes, having grown 82% between 2012 and 2017.
- Fund of hedge funds continue to see their AUMs fall. We expect them to end 2013 with less than a quarter of the assets they had at the end of 2007.
“Whatever the future holds, some things remain constant. Firms are becoming used to a near-continuous process of embedding regulatory change.”Roy Stockell
EMEIA & Asia Pac Asset Management Leader
Download full forecast×
The run-up to Christmas and the start of 2014 proved to be a busy time for Europe’s financial sector. Sadly, this was less to do with the festivities and more to do with the necessary groundwork to underpin the Eurozone’s new regulatory framework. After lengthy delays, work around Solvency II — recently re-animated by agreement over the Omnibus II Directive — is starting to pick up again, but with the focus now increasingly on Pillar 3. However, there is no doubt that the European Central Bank's (ECB) asset quality review (AQR) and comprehensive assessment represents the largest workload.
The effects of the AQR will be felt beyond the Eurozone, as over 120 of the largest banks find their global assets and capital positions coming under unprecedented scrutiny. There is widespread acceptance that the AQR process is likely to highlight the need for significant additional capital. The only debate is how much, and the nature of the resultant consequences.
The Cyprus experience demonstrated a new “working template” that the first capital losses will be borne by equity holders, followed by junior bond holders, before potentially inviting “contributions” from large depositors. ↓ [... more]
While investors and depositors may be somewhat nervous at the moment, it’s worth reflecting that the likely ripple effects will extend beyond banking alone.
Since 2008, “real” interest rates have been anchored at all-time lows. Therefore investors, including many of Europe's smaller mutuals and pension funds, have been searching for yield to underpin returns and offset investment guarantees sold during better times. High yielding bank debt has been an attractive destination for some, inadvertently exposing them to the risk of write-downs in the event of capital shortfall. While unlikely to represent any significant contagion risk for the broader European financial services market, it will likely trigger some shifts in investment strategy.
So how might we expect banks that are faced with a capital shortfall to respond? A disposal programme is one option, but prices are yet to recover. The stronger banks will use the AQR as an opportunity to pick up assets in strategic growth markets. Alongside trade buyers, private equity funds, both in Europe and the US, are circling. They are attracted by the expectation of improving returns as the European economy recovers. What about raising fresh equity? In the current climate — while possible — it remains expensive and not without execution risk. Investors continue to look for predictability of returns. This is somewhat challenging for the banking sector, given the current fluidity of the regulatory and political landscape.
The final option, once eligible investors and depositors have been bailed in, is to turn once again to the ‘investor of last resort’, the state. This continues to be nobody's preferred option. Details for the resolution and recovery framework within the Banking Union have been announced. We now know that we will not have a fully capitalized, EU-wide resolution fund and framework in place to deal with the consequences arising from the AQR process.
So for now, national governments will continue to be first in line. This will be a challenge given the strained public finances in much of Europe. As so often in Europe, the financial and the political are intertwined. Similarly, the AQR’s progress over the next year will be linked closely with the fate of the Eurozone’s economy.
The latest forecasts anticipate a mild but slow recovery, and raise the very real prospect of a two-speed Europe. Economic recovery depends on a banking system that is not only well capitalized, but also able to extend credit where it is needed. Right now, Europe’s SMEs need it more than most. Recent research estimates that across Europe, SMEs represent 99% of businesses and rely on commercial banks for 80% of their total financing. If their access to credit is restricted by capital-constrained banks, then availability and accessibility of other sources of finance such as direct lending from asset managers could prove crucial to economic growth. With the benefit of hindsight, the timing of the AQR program, coming alongside a sluggish recovery is less than ideal.
Many have drawn unfavorable comparisons with the comparatively rapid, coordinated recapitalizing of the US banking system. While painful, few would argue that the AQR is not necessary given the situation. More importantly for the future, the form and nature of the Banking Union Framework is now taking shape and, while not complete and possessing a few political compromises, few can deny it has been accomplished at a pace not normally associated with EU-wide financial services regulation. This should bode well for the future.
Download full forecast×