Muted optimism as European banks continue their rehabilitation
London, 24 June 2013
Banks across Europe are viewing the next six months with muted optimism according to Ernst & Young’s European Banking Barometer, released today. Fewer banks expect to have to resort to central bank funding and, although cutting costs remains high on the agenda, the pressure on job cuts is abating.
- Less than 25% of banks expect to increase their use of central bank funding and almost 40% expect to repay such programs in the next six months
- A third of banks still expect to have to increase loan loss provisions
- Lending outlook for construction and real estate to fall again but lending to SMEs and manufacturing to increase
The European Banking Barometer is a biannual survey of 250 banks across Europe, covering Austria, Belgium, France, Germany, Italy, the Netherlands, the Nordics, Poland, Spain, Switzerland and the UK.
Robert Cubbage, Ernst & Young’s Europe, Middle East, India and Africa (EMEIA) Leader for Banking and Capital Markets, comments:
“There has been a subtle shift in confidence in the last six months and the overriding sentiment from the European banking industry is now one of cautious optimism. Cost-cutting, the regulatory agenda and loan loss provisions all continue to cause the banks headaches but, for the first time in years, banks are predicting that they will see increased demand across most of their business lines. This is one of the most promising signs that the industry may well be on the road to recovery, but banks’ optimism is dependent on continued confidence in the economy and remains vulnerable to economic set-backs.”
Banks will continue to wean themselves off of central bank funding
Forty-five percent of all respondents are confident that they will be able to improve their funding mix this year. Less than 25% expect to access central bank funding programs and 39% of banks expect to be better able to repay these funding schemes. However, responses across Europe are not all so optimistic; 50% of banks in Italy, 42% in France, and 40% in Spain all expect to have to increase their access to central bank funding.
Banks will have to continue to deleverage and sell assets to bolster their balance sheets. Banks in Spain and Italy are the most likely to sell assets, with 50% of respondents saying they expect to sell assets in the next six months, compared to 35% of respondents across other markets.
Half of all the banks surveyed expect to continue to shrink their balance sheets, with 60 % of banks in the UK and France putting slightly more emphasis on this. Steven Lewis, Lead Global Banking Analyst at Ernst & Young, comments:
“While banks are still part-way through their rehabilitation following the financial crisis, the benefits of the restructuring programs are starting to come through. Some banks, in particular in the northern Eurozone economies and in countries outside of the Eurozone, will be in a position to start to focus on growth again.”
Some banks now expect to start focusing on growth opportunities, with 25% considering asset purchases in the next six months.
Ongoing restructuring programs will lead to further job cuts
Forty-one percent of banks still expect to reduce headcount. The greatest job losses are expected in Austria, Italy, the Nordics and Poland, where over 60% of banks expect to make cuts. Significant cuts are also expected in the UK and the Netherlands, but the outlook for these two markets is significantly improved compared to the stats from six months ago.
Steven says: “It’s not surprising that banks expect job cuts to continue to play a significant role in their restructuring and cost reduction agendas but we think the pace of cuts is now slowing in most markets. Headcount reduction programs do take time to implement and most of the job cuts anticipated by the banks will be part of redundancy programs they have already announced. Perhaps most importantly, we are seeing a shift from short-term cost cutting to more strategic cost-cutting programs.”
A third of banks still expect to have to increase loan-loss provisions
The growth in loan loss provisions is abating, 32% of banks expect to have to increase provisions over the next six months, compared to 44% of banks six months ago. However, while in the UK, Switzerland and Austria write-offs look to have stabilized, banks remain worried about loan losses and more than half of the banks in Poland and Spain expect to increase loan loss provisions in the next six months.
Lending to SMEs to increase but real estate and construction to struggle
Since the survey six months ago, the outlook for lending has weakened even further across most sectors – it is only in lending to SMEs and manufacturing that banks expect to be able to lend more.
For construction and real estate, in particular, the picture is bleak – six months ago banks said they were going to introduce more restrictive lending policies for these sectors and it looks like the policies are going to be tightened again across all markets. In contrast, banks are relaxing their lending policies for SMEs in all markets other than Poland, the Nordics and Spain.
Steven says: “Banks are already struggling with their existing loan books, especially loans to construction and real estate, and so it is not surprising that they have less of an appetite to take on more risk in these sectors. The responses on SME lending are encouraging and a sign that some of the policy to boost lending to SMEs across Europe is having an effect. However, as banks continue to deleverage, lending more to one sector, especially one as capital intensive as SMEs, necessitates cuts elsewhere - any upside for SMEs will have an inverse effect on loans to other sectors.”
An improved outlook for most business lines, even investment banking
Banks anticipate an improved outlook for most business lines – they are most positive about retail and private banking but, after a challenging 2012, the greatest improvement is for investment banking activity. Over 25% of respondents are positive about the outlook for M&A and banks also expect an improved performance from their debt issuance and trading businesses.
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