More job losses and greater lending restrictions on the cards despite rising optimism of UK banks

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  • 64% of UK banks expect a reduction in headcount in the first half of 2013

  • 41% of UK banks expect improvement in UK economy and 59% expect their own performance to improve

  • Lending to construction and commercial real estate will be hit hard

  • 55% of UK banks hope to sell assets in the next six months

In the first half of 2013 the UK banking industry will be defined by headcount reductions, asset sales, and further lending restrictions, despite UK banks expecting a strengthening of both the domestic economy and their own bank performance, according to EY’s European Banking Barometer, which is released today.

The 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. The UK respondents represent 78% of the total assets of UK banking industry.

Major job losses in head office expected in the first half of 2013 as UK banks reduce costs

Cost cutting and minimising non-essential spend are the top priorities for UK banks with only risk management rated as more important for the next six months. In a revealing sentiment shift, more than 64% of UK banks expect a reduction in headcount in the first half of 2013, compared to 12% six months ago. Significantly more banks expect to make headcount reductions in the UK than in mainland Europe where

45% expect to make headcount reductions.

Head office and administrative functions are expected to be the most adversely impacted with 79% expecting cuts to headcount in these areas. UK investment banking divisions are also expected to be hit hard by cost cutting, with 50% of respondents seeing headcount decrease compared to just 30% across Europe. Retail and business banking also face a challenging period ahead with 43% of respondents expecting cost cuts to impact headcount.

Steven Lewis, Lead Global Banking Analyst comments: “We have already seen numerous announcements on job losses and the barometer shows that the industry is likely to face further redundancies – almost two-thirds of UK banks are expecting to reduce their headcount next year. The anticipation of regulatory-driven structural change is forcing banks to reconsider their business models and some job losses will be inevitable as banks focus on smaller number of core areas.”

UK Banks more optimistic about asset sales and partnerships in the New Year

Driven by renewed optimism about the economy, the UK banking industry is hoping to be able to sell assets in the next six months; 55% of UK banks expect to sell assets compared to 30% of their European counterparts. 41% UK banks are also looking to form partnerships and joint ventures, compared to 29% for Europe.

Steven says: “Banks are expecting the economy to pick up, which should help them with deleveraging through asset sales, but deleveraging will not be the sole driver of asset sales next year. As competition remains high on the government agenda, and structural reform looms on the horizon, the shape of the UK banking industry will continue to change. Banks will be looking to reposition themselves, exiting some lines of business but also building partnerships and joint ventures to try to access new markets.”

Lending outlook dire for construction and CRE but lending to SMEs to improve

50% of banks in the UK expect their lending to the construction and commercial real estate sectors will become more restricted. 30% say lending to IT, Financial Services and Transport will also be negatively impacted. However, there are some brighter spots, a net 15% of lenders expecting to relax their lending policies for SMEs.

UK banks more optimistic about economic outlook

In a sign of optimism, 41% of UK banks believe that the economic outlook in the UK will improve in the next six months, in contrast to 19% in mainland Europe. At the same time 59% expect a strengthening in individual bank performances, compared to 37% across Europe.

In terms of business lines, UK banks are most positive about the deposit business, as well as the retail banking side, with 41% and 46% respectively anticipating a good or very good outlook for these business lines. In contrast, the outlook for investment banking is weaker; for example only 10% expect the outlook for transaction advisory or securities services to improve.

Risk appetites in the UK banking industry have reduced, with 91% of banks expected to reduce loan-to-deposit ratios in the next six months. Similarly, all UK banks expect reducing the size of balance sheets to be a priority over the next six months.

Loan losses less volatile than in Europe

Over the next six months, UK bank respondents expect their bank’s total provisions against loan losses to be less volatile than in mainland Europe. No UK banks expect provisions to increase or decrease significantly – 45% expect provisions to remain at current levels and the remaining banks are fairly equally split on whether they expect a slight increase or decrease in provisions. In Europe, 44% of banks expect provisions to increase.