Asset Quality Review will extend Eurozone’s banking pain beyond expected trough in 2013.
- Lending to hit new lows in 2013 as total banking assets fall back to 2008 levels
- Write-offs will peak at 7.5% in 2013 and will still sit at 4.3% by 2017
- AQR may force banks to shrink balance sheets by further €1.5t
- Household wealth up 23% by 2017 creating opportunities for investment products
London, Moscow, 23 September 2013. Recession, unemployment and lower real incomes continue to represent a major challenge to financial services across the Eurozone, according to EY’s Eurozone Financial Services Forecast. The pace of deleveraging has not slowed, the outlook for lending is worse than expected, and while non-performing loans were expected to peak this year, the ECB’s Asset Quality Review (ACR) could push the peak out to 2015 in some markets.
Andy Baldwin, Head of Financial Services, Europe, Middle East, India and Africa (EMEIA) at EY comments: “In March we thought that the industry was close to turning a corner, but we don’t now expect a recovery for another year at the very earliest.
“The outlook for financial services cannot be separated from the Eurozone’s economic and political climate. The economic recovery is slower than we had hoped, unemployment is higher, and the demands of national politics continue to create bumps in the road. Until we see the terms of the ECB’s AQR it is hard to predict its impact but, if we compare progress made on balance sheets in the US with those in the Eurozone, it’s not unrealistic to expect an additional €1.5t contraction in Europe, pushing the recovery out even further.”
Lending to hit new lows as bank deleveraging continues at pace There was a marked reduction in demand for personal and housing loans in the first quarter of the year as Eurozone unemployment continued to rise. Business loans are forecast to hit a six year low of €4.5b, personal loans will shrink to €595b, a seven-year low, and there will be £46b less residential mortgage loans in the market than last year. Banks continue to deleverage at the same sharp pace as in 2012, shrinking their total assets by another €850b this year.
Marie Diron, Senior Economic Adviser to The Eurozone Financial Services Forecast adds: “The protracted recession is undoubtedly delaying the revival in demand for banking services. At best, in markets like Germany and The Netherlands, total lending to the economy is stable, but in France, Italy and Spain demand for loans is still decreasing.
“We had hoped that the most destructive phase of deleveraging in the Eurozone had passed, but it is continuing at pace this year. Total assets will have fallen to 2008 levels by the end of the year and, if the AQR program pans out as we expect, total assets could fall further to 2007 levels by the end of 2014.”
Forecast for Non-Performing Loans (NPLs) worsens again NPLs in the Eurozone will peak at a Euro-era high of 7.5% of total loans this year, up from an estimated 6.7% at the end of 2012. NPL rates are already declining in The Netherlands but will climb to a peak of 11% in Italy this year and are forecast to reach 12% in Spain in 2014, notwithstanding the recent transfer of problematic assets to SAREB. Even by 2017, Eurozone NPLs will continue to average 4.3% of total loans, which is still high by pre-crisis standards.
Robert Cubbage, EY’s EMEIA Head of Banking, says: “Non-performing loans are going to continue to rise as banks’ balance sheets catch up with economic reality. A decline in core Eurozone NPLs is anticipated from 2014 onwards, but this is entirely dependent on an economic recovery and the results of the ECB’s rigorous AQR exercise.
“NPLs at these levels will impact banks’ balance sheets and, despite political pressure, banks will struggle to expand their lending to businesses and households until the NPLs they already have on their books have been worked out.”
Ageing, wealthy population holds opportunity for asset managers and life insurers By 2017, gross household wealth is forecast to have grown by 23% and 20% of the population will be over 65 years old. Recent experience in Japan suggests that, as the population ages, the demand for savings products, health insurance and critical illness products rises.
Andreas Freiling, EMEIA Head of Insurance at EY says: “Japan has shown that demographics will drive demand for life insurance products regardless of a prolonged low interest rate environment. Insurers in Europe need to work out how to intelligently address the needs of an ageing population, while limiting their own exposure to longevity risk.”
Roy Stockell, EMEIA Head of Asset Management at EY, adds: “Europe’s ageing population also represents a strategic opportunity for asset managers – the industry is currently under-represented in post-retirement financial de-cumulation but there will be demand for products that meet a range of needs from travel to long-term care. Co-operation with life insurers may represent the best chance of success.”
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