More job losses predicted by European banks as crisis refuses to fade
- Further cost cutting measures, restricted lending and consolidation pressures will define a more cautious banking industry in the next six months
LONDON,MOSCOW, 19 DECEMBER 2012 – Cost cutting, in particular reduction in headcount, has moved up the priority list for both retail and investment banks in the next six months as they face growing concerns about the European economy and the sovereign debt crisis, according to EY’s European Banking Barometer, which is released today.
The European Banking Barometer is a biannual survey of 270 banks across Europe, covering Austria, Belgium, France, Germany, Italy, The Netherlands, the Nordics, Poland, Spain, Switzerland and the UK.
Cost cutting to bite in first half of 2013 with more job losses
Cost cutting has risen up the priority list and is now second only to the compulsory regulation and risk management agenda in European banks’ priority list. As a result 45% of European banks expect headcount to decrease in the next six months. Banks in The Netherlands and the UK will be worst affected with 70% and 64% of banks respectively expecting to decrease their headcount. Banks in the Nordics are more optimistic but even in this region 22% are expecting to reduce headcount.
Head office functions are anticipated to be most adversely impacted with 58% of banks expecting cuts in this area. The biggest cuts are expected from the universal and corporate/investment banking sectors, where half of respondents expect to make headcount reductions. Retail banks and wealth managers are less pessimistic.
Marcel Van Loo, Europe, Middle East, India and Africa Leader for Banking and Capital Markets, comments: “Cutting costs, streamlining processes and minimizing non-essential spend are all now in the top five priorities of banks for the next six months. We have already seen the start of the job losses and the barometer shows that the industry should not expect these to be isolated cases – almost half of banks across Europe are considering reducing their headcount as they struggle to control costs in the low-growth environment.”
Impact of sovereign debt crisis expected to increase
There are rising concerns about the impact of the Eurozone debt crisis in the next six months. Banks in Spain, France, Switzerland and Italy are most worried, with The Netherlands and Belgium the least worried. In addition, macroeconomic worries continue to dominate the European banking industry with banks split on whether their economy will remain the same (40%) or worsen (42%).
Few executives are willing to express a view that their bank’s performance will strengthen or weaken significantly in the short term. The exception is the UK where some 59% believe they will see a strengthening.
When comparing the sectors, the outlook is bleakest for investment banking activity. Less than a quarter of respondents are positive about the outlook for securities trading, transaction advisory (M&A) and debt and equity issuance, whereas almost half of respondents are positive about retail banking and deposit business. As a result, wealth management firms and private banks show the most overall optimism with 48% expecting performance to strengthen. In contrast, 31% of universal banks expect performance to weaken going forward.
Steven Lewis, Lead Global Banking Analyst at EY comments: “Investment banking has already been through some tough times and it looks like banks are expecting the challenging economic and regulatory environment to impact their businesses even further in early 2013.
“While all banks are to some extent affected by economic worries and the sovereign debt crisis, investment banking activity is also threatened by a raft of regulation coming in next year and is also disproportionately hit by lack of confidence in the market. As a result, more banks are likely to be making some bold decisions about these business units.”
The industry will be reshaped through consolidation, asset sales and joint ventures
Forty-seven percent of banks expect to see significant consolidation happening in their markets within the next three years. However, the market is split geographically – while almost all Swiss respondents and 78% of Spanish respondents anticipate this reshaping of the landscape, just 1 in 10 in the UK do so, and none of the banks in Belgium foresee consolidation. Industry consolidation is most anticipated in wealth management and private banking, with specialist banks least likely to see consolidation in their markets.
Beyond consolidation, two thirds of banks are likely to consider selling assets, buying assets as well as joint ventures. Some 30% of banks surveyed intend to sell assets in the next six months, with Spanish and UK banks likely to be the most active. Twenty-nine percent of European banks are also likely to consider joint ventures and partnerships going forward.
Steven says: “There will undoubtedly be more movement in the market in 2013 and the end result will be fewer banks, many of them much smaller. Some universal banks are struggling with their current business models and smaller players are finding it difficult to operate in this capital intensive environment. In markets where the banking industry remains fairly fragmented, pressure to consolidate or start joint ventures will undoubtedly be high.”.
Renewed emphasis on increasing cash reserves and deleveraging
Continued pressure for increased capital requirements means that banks are pushing to increase the size of their cash reserves through a mix of actions. Some 56% plan to introduce more incentives to increase customer deposits, 53% are aiming to reduce the size of their balance sheet, while some 44% are intent on reducing their loan-to-deposit ratios.
Loan loss provisions expected to increase and lending to remain restrictive
Eighty-five percent of banks expect provisions to remain at their current level or increase in the short term, whereas just 15% expect them to fall. Banks in Poland, Spain and Italy and are expecting to increase provisions most significantly; 67%, 56% and 54% of respondents in those countries respectively are expecting to increase their provisions, compared to just 23% in the Nordics, 30% in Austria and The Netherlands, and 32% in the UK.
Corporate lending policies are expected to become increasingly restrictive. Healthcare and IT are the only sectors seeing some relaxation, while construction, commercial real estate and transport remain very constrained. In addition, 34% of banks are expecting lending to consumers to decrease over the next six months.
Marcel concludes: “Credit remains tight across Europe and banks are increasingly nervous about the impact of non-performing loans on their books, which is having a knock-on effect on their lending policies. Sectors in which lending will be restrictive correlate with sectors in which non-performing loans are high, such as real estate and construction. This philosophy will also impact consumer lending, levels of new lending will depend on whether those consumers who already have loans can pay them back. In addition we will continue to see banks trying to raise customer deposits.”
Maxim Bychkov, EY CIS Advisory for Financial Services Leader, says: “Unlike most of the developed markets, the Bank of Russia expects banks to make record-high profit, i.e., one trillion rubles, in 2012 (in the first 10 months, banks earned 834 billion rubles, or 23% more than in the same period last year). The forecasts for business development in 2013 are also favorable: the retail portfolio in Russian banks is expected to grow by 20-25%, and the corporate portfolio, by 10-15%.”
“Although the Bank of Russia intends to take certain steps to curb growth, largely by increasing allocations to reserves and making the appraisal of risk assets more stringent, the steps will most probably have a delayed effect in 2013. Banks have a substantial amount of reserves, and their dissolution was not extensive, while risk management considerably improved in comparison with the pre-crisis level. Nevertheless, the banks’ interest gain is expected to drop to 4-5 % and their profit trend, to grow more slowly.” – Maxim adds.
He concludes: “In 2013, the Russian banking system will most probably not repeat the unfavorable development observed in the developed markets, provided that no substantial shock waves come from outside.”
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