Loan losses likely to rise, but remain below global financial crisis levels
A weaker eurozone economy is likely to drive a rise in impairments across all forms of bank lending, but the EY European Bank Lending Forecast does not expect significant increases, and certainly not at levels recorded during and after the eurozone debt crisis. Loan losses across the eurozone are forecast to rise 2.6% this year, from 2.2% in 2021, and slowly rise over the subsequent years - as is common within the economic cycle following a downturn - to 3.3% in 2023, 4.2% in 2024 and 5% in 2025. For context, loan losses peaked at 8.4% in 2013.
Tighter, post-Global Financial Crisis regulation and lending criteria should mean mortgage borrowers are better able to deal with higher rates, while the savings built up by households during the pandemic are likely to provide a cushion of support against falling incomes and rising job losses. On the corporate side, national government-backed loan schemes offered during the pandemic, which tended to offer generous repayment terms, should limit a rise in the share of non-performing business loans, at least in the short-term.
Nigel Moden, EMEIA Banking and Capital Markets Leader at EY, comments: “Europe’s banks are playing a significant role in keeping capital flowing and ensuring access to crucial lines of finance at a challenging economic time. With high capital buffers and resilience built up over 15 years, the region’s major financial institutions are well placed to continue supporting customers and have shown impressive fortitude despite the ongoing market challenges they face. The recessions predicted this winter in many European markets will of course come as a challenge, but the expectation is that they will be relatively shallow and borrowing should rise steadily from 2024. As this more positive outlook suggests, the banking sector can return its focus to growth, innovation and improved sustainability.”
Germany – set for steepest economic decline of major eurozone economies
Although traditionally the strongest of the eurozone economies, Germany is set for the fastest decline in GDP next year due to energy price pressures, energy supply issues, and weaker overseas demand, with GDP expected to contract 1.1%.
The prospects for bank lending growth next year are also expected to be weak as demand reduces and overall bank lending in Germany is forecast to fall 1.7% in 2023. Mortgage lending is predicted to contract 0.1% in 2023 – the first decline since 2008 – and consumer credit is forecast to fall 1.6%. On the corporate lending side, the stock of business loans is expected to fall 2.9% in 2023, representing a 10-year low, as the economic situation deteriorates. However, the outlook for all forms of lending is expected to pick-up in 2024 with growth forecast to return at 3.2% (2.8% mortgage growth, 1.9% consumer credit growth and 3.7% business lending growth), followed by a further rise in 2025 of 3.8%.
France – expected to outperform its eurozone peers in the short-term
The French economy is expected to outperform its major eurozone counterparts in the short-term. However, a shallow recession over the winter and into 2023 looks likely, reflecting higher inflation, depressed consumer confidence and rising borrowing costs. GDP growth is forecast at just 0.2% next year.
Overall bank lending is forecast to fall 0.8% in 2023. Mortgage lending is forecast to rise just 1% next year – outpacing eurozone counterparts, but still France’s slowest rate since 2014. Consumer credit is forecast to fall 1.4%, representing the first contraction since 2013, while business lending is expected to decline 2.5%, marking its first fall in 14 years. A return to growth though is expected across all forms of lending in 2024 of 2.6% (1.9% mortgage growth, 2.1% consumer credit growth and 3.4% business lending growth). Total lending is forecast to rise 3.4% in 2025.
Spain – housing market exposed to interest rate rises
Spain is less exposed to potential gas shortages than other European countries, but high energy prices, weakening consumer confidence and high inflation mean the economy is likely to fall into a shallow recession this winter, with 0.8% GDP growth forecast in 2023.
In terms of total Spanish bank lending, the EY European Bank Lending Economic Forecast predicts a fall of 1.3% in 2023. The structure of Spanish mortgages (with the vast majority currently on variable rate contracts) means the housing market is more exposed to rising interest rates than many other eurozone countries. But new measures have recently been announced to provide support to those in difficulty and make it easier to switch to fixed term contracts, and recent lending survey data from the ECB suggests weakness in mortgage demand is less marked than in Germany and France.
Overall, mortgage lending is forecast to fall 0.6% next year, while consumer credit is forecast to decline 1.1%, reflecting high inflation and depressed consumer confidence, while business lending is expected to fall 2%. Like the other major eurozone nations, a return to growth is expected across all forms of lending in 2024, with a rise of 2% (1% mortgage growth, 2.6% consumer credit growth and 2.8% business lending growth). Total lending is forecast to rise 3.4% in 2025.
Italy – at risk of energy disruption and gas shortages
A positive tourist season, following the lifting of COVID-19 restrictions, boosted Italian GDP in the third quarter of 2022. However, Italy faces a difficult period ahead, not least because its economy is set to shrink 0.1% in 2023. Italy is at higher risk than some of its eurozone peers from disruption to gas supplies, owing to its high dependence on imported energy, as well as being more exposed to rising interest rates as a result of its large public debt.
In terms of overall bank lending, the forecast is for a fall of 1.8% in 2023. Mortgage lending is forecast to fall 0.3% next year – the first decline since 2014 and aligned to other eurozone economies, largely due to falling real household incomes and a tightening of monetary policy by the European Central Bank. Consumer credit is forecast to fall 1.5% next year, while business lending is expected to decline 2.8%. Like the other major eurozone nations, a return to growth is expected across all forms of lending in 2024, with total growth of 1.3% (1.4% mortgage growth, 2.2% consumer credit growth and 1.1% business lending growth). Net bank lending is expected to rise a further 1.9% in 2025.
Omar Ali concludes: “European households, businesses and banks were well on the road to recovery from the worst of the pandemic when war in Ukraine began and markets were faced with a new wave of economic challenge. Rising inflation, interest rates and energy prices, along with disrupted supply chains, significant geopolitical and market uncertainty have combined to put significant pressure on economies, businesses and lenders in the short-term. 2023 looks like it will be the most challenging year since the end of the financial and subsequent eurozone crisis. As long as the war in Ukraine does not escalate, the downturn is expected to be short-lived, with a bounce back forecast in 2024 and 2025. This makes it all the more important that banks and policymakers work together to weather 2023 and put Europe’s economy in the best place to recover quickly.”
Notes to editors:
About the EY European Bank Lending Economic Forecast
The EY European Bank Lending Economic Forecast is based on economic forecasts using data from the European Central Bank, and covers the eurozone, Germany, France, Spain and Italy.
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