At least 22 European banks expect to raise capital following the AQR

London, 23 June 2014

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Most European banks believe they’ve raised enough capital to weather the Asset Quality Review (AQR) and stress test, but, in an anonymous poll of 294 banks across Europe, 22 said they expect to have to raise capital following the exercise and 43 said they may need to, according to EY’s European Banking Barometer for the first half of 2014.

  • German banks are most confident; Spanish banks most likely to need capital
  • AQR is pushing out the time frame for major European banking consolidation
  • Headcount is still falling, but lending to the real economy and pay are expected to increase

Despite this, European banks are optimistic about their growth and financial performance this year, and are expecting to increase both lending to the real economy and pay to their employees.

Steven Lewis, Lead Global Banking Analyst at EY, says: “On the face of it, squaring banks’ optimism on recovery and growth with their expectations around having to raise further capital is difficult. But if you look more closely at the results, it’s clear that there is increasing divergence between the strong and the weak. Stronger banks are expecting their financial performance to improve and to be able to increase lending and pay this year as a result, while the weaker banks are still concerned about capital levels.

“We have already seen significant pre-emptive capital raising in the market. With such a high number of banks considering coming to the market for more capital in Q3 and Q4, this looks to have been a wise move.”

Thirty percent of Eurozone banks may need more capital

Across the Eurozone markets surveyed, on average about 30% of banks cannot rule out further capital raising post-AQR. Across the whole sample of European banks, a significant minority of banks (8%) fully expect to have to raise further capital following the AQR and a further 20% think they might still need to raise capital.

Banks in Germany were most bullish with just 4% expecting to have to raise capital and a further 2% unable to rule it out. Banks in Spain were least confident with 35% expecting to have to raise more capital and 25% unable to rule it out.

The survey was conducted in March 2014 and, by the end of polling (4 April), six Eurozone banks had already executed a capital raising initiative this year. By 4 April 2014, Eurozone banks had raised US$11b compared to US$2b for the same period in 2013. Since then another 10 banks have announced plans to raise capital prior to the completion of the AQR. In total this year, European banks have already raised US$35b of equity, which is 70% more than was raised in the same period in 2013.1

Market divided on loan-loss provisions

Thirty percent of banks also expect to have to raise provisions this year. Banks in Spain and Austria are most likely to raise provisions: banks in Spain have lingering concerns about sovereign debt problems and have been required to revalue their real-estate portfolios; banks in Austria are least confident about the economy and are more exposed to Eastern Europe.

However, the improving economic conditions mean that 23% of banks expect to be able to release provisions in the next six months, which is an improvement on H2 2013, when just 14% expected to be able to release provisions.

In part, this market divide can be traced back to local-market concerns about the economy and lingering concerns about sovereign debt, but there is also a clear correlation with pressures put on banks by the AQR. Only banks in the UK and the Nordics believe that on balance total loan-loss provisions will decrease this year.

AQR pushing out the time frame for any major European banking consolidation

When asked in 2012 if they expected major consolidation within the industry, 50% of banks surveyed said they expected consolidation within the medium to long term. However, major consolidation in the market has yet to materialize and banks in most markets expect any major consolidation to still be three years away. Just 7% of respondents anticipate large-scale consolidation in the next 12 months, but 63% expect medium- to large-scale consolidation in the next three years. 

Robert Cubbage, Europe, the Middle East, India and Africa (EMEIA) Lead for Banking and Capital Markets at EY, comments: “There remains a general consensus that medium- to large-scale consolidation in the European banking market is inevitable. However, it is still early for the European economic recovery and with the AQR on the horizon, most institutions remain cautious of major acquisitions in the near-term, so the timescales for this activity are being pushed out.” 

Over the past five years, many banks have sold assets as they raised capital and restructured their businesses, but with the bulk of balance-sheet shrinking and tactical restructuring completed, the number of bankers expecting asset sales even on a small scale has fallen, with 45% expecting no activity at all over the next six months. Where banks are considering expansion overseas/outside of Europe, alliances are the most attractive option. 

Overall headcount continues to fall but pay is expected to increase

Headcount continues to fall but the pace of cuts is slowing in most countries. A significant number of banks expect further job losses in Austria (53% of banks), France (40% of banks) and Switzerland (35% of banks), where cost-cutting remains a key concern. However, in the Nordics and the UK, where institutions are beginning to focus on growth, nearly half of respondents expect to increase headcount. The greatest cuts continue to be in head-office, operations and IT, whereas banks are recruiting in compliance and growth areas such as private banking. 

Most bankers expect their pay to remain relatively level, but 28% expect pay to increase. A quarter of respondents expect pay increases of 2% or more in 2014 – which is above the current rate of inflation in the Euro area and the average wage inflation in Europe (currently 1.5%). At the top end of the scale, 4% of respondents expect double-digit pay increases. 

“Very few bankers expect pay rises over 5%, but a significant minority do expect pay rises in the region of 2% to 5%. In part, this reflects concerns about the impact of CRD IV. Under the new regulation banks are faced with increasing fixed costs now in anticipation of paying lower bonuses, but there’s no guarantee it will actually reduce total remuneration packages. As the new pay schemes start to be implemented in the market it opens the opportunity for top talent to renegotiate and could actually drive remuneration costs up. 

“The pay expectations at the top end of the scale match pay increases we have seen in the US, so there’s also an argument that investment banks in particular are concerned about the need to remain globally competitive,” concludes Lewis.

1Source: Thomson ONE.


Notes to editors

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About the European Banking Barometer – 1H14

Now in its fifth edition, the latest Barometer is compiled from 294 interviews with senior bankers across 11 markets: Austria, Belgium, France, Germany, Italy, the Netherlands, the Nordics, Poland, Spain, Switzerland and the UK. It covers at least 50 of banking assets in each market. To see the full results please see