EY Eurozone forecast: Winter 2014

EY Eurozone forecast: outlook for financial services

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Welcome to the Winter 2014 edition of the EY Eurozone forecast: outlook for financial services.

Andy Baldwin, EY Head of EMEIA Financial Services
“The AQR exercise on balance has brought some of the hoped-for improvement in confidence to the European banking system to create a more robust platform for banks to lend and support the recovery. But, the stress tests cannot kick-start loan growth on their own. To really lift the Eurozone economy we need to stimulate demand for lending and appetite for growth in the real economy.”
Andy Baldwin
EMEIA FSO Managing Partner
Read Andy's Forecast Overview here

Our Winter 2014 Eurozone forecast: outlook for financial services sees improving GDP, growth in consumer spending and falling unemployment. But what does this mean for financial services?

Banking outlook:

For Eurozone banks, the AQR has restored confidence in the industry and laid a solid foundation for increased lending. Profitability is also improving, but there are still questions about banks’ ability to improve return on equity and whether there is demand for loans.

Insurance outlook:

Insurers continue to face the challenges of low interest rates and the resulting squeeze on margins, while also trying to trying to assess the potential impact of the OECD’s BEPS initiative and regulatory shift towards customer conduct and client interaction.

Wealth and asset management outlook:

Assets under management across the Eurozone continue to rise, and the industry is focused on gearing up to play a role in response to the shortfall in personal savings for retirement by diversifying into alternative, real-world assets.

Read our latest forecast for further analysis and forecasts of the major macro-economic trends, as well as insight from EY’s EMEIA leaders on what it means for banking, insurance and wealth and asset management.

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Andy Baldwin, EY Head of EMEIA Financial Services
Andy Baldwin
Managing Partner

As Winter sets in, the economic temperature continues to vary widely across Europe, with the marked distinction between those countries that have embarked on structural reforms generally outperforming those that have not. This is likely to mean the current low interest rate environment will continue and business lending will not rebound until next year – and even then, only modestly. We expect some areas of lending – notably to SMEs – will continue to lag behind the market as a whole.

A divergence of monetary policy from the world’s central banks

The threat of deflation is keeping Eurozone base rates at 0.25% and prompting European Central Bank (ECB) action in the covered bond markets. The US Federal Reserve is exiting from QE, and the Bank of Japan is escalating its asset purchase program. Rarely has there been a time in recent years when the policies of the world’s central banks have been so divergent.

Against this background, the ECB has announced the results of its asset quality review (AQR) and stress tests. It sought to draw a line under the uncertainty on European banks’ stability before taking over as sole regulator in November. There were no big surprises in the results. The number of banks needing to raise capital came in at the top end of expectations but the overall capital shortfall was smaller than feared.

AQR has improved confidence, but more is needed to lift the Eurozone economy

The AQR exercise on balance has brought some of the hoped-for improvement in confidence to the European banking system to create a more robust platform for banks to lend and support the recovery. Capital positions have also improved due to the significant amount of deleveraging that has already taken place preceding and during the AQR exercise.

But to 'kick start' Eurozone growth more is needed – and all eyes are on the ECB. It has already engaged in “QE-lite” through its covered bond purchases and fixed-rate loans to banks. The question is, what further steps can and might it take to speed recovery?

The answer may be influenced by the advent of Jean-Claude Juncker’s new European Commission, with its strong mandate to promote jobs and growth, and hopefully a more free market-minded Commissioner for Financial Services. The proposals on the creation of European Capital Union are particularly exciting given Europe's dependence on bank originated lending.

The hope is that the new Commission will support the steps needed to help the industry as a whole build on the AQR and play its full part in acting as a catalyst for stimulating the Eurozone economy.
These steps should include:

  • removing red tape and taking a measured and balanced approach to regulation
  • promoting the global competitiveness of Europe’s financial services industry
  • balancing the need to address historical redress issues while ensuring the focus is on the forward view on the conduct agenda
  • encouraging greater diversity in a European long-term funding environment

As the new global and European regulatory framework introduced post crisis 'beds in' - the hope is that focus will shift towards enabling the banks to create jobs and growth in the 'real economy'.

While we believe these goals are achievable, there are a number of hurdles still to overcome. The ongoing geopolitical crisis, expansion of economic sanctions and and navigating the US regulatory system will provide particular challenges to the European financial services industry. The environment is accelerating the general retrenchment and operating model simplification by a number of banks.

So challenges remain. But overall, the hope is that the AQR and stress tests have gone some way to restore some comfort in the stability of the banks’ capital position. Now they can refocus their attention on how to enable banks to apply that capital to foster economic growth.