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Muted optimism as European banks continue their rehabilitation

Date: 08/05/2013
Source: EY
Muted optimism as European banks continue their rehabilitation

  •  A third of banks still expected to increase credit risk provisions
  •  Deleveraging continues, 50% of surveyed institutions expecting to decrease their exposure
  •  Less than 25% of banks expect to appeal to a greater extent than last year to central bank funding and nearly 40% expect to repay these programs in the next 6 months
  • Despite the difficult economic environment and limited revenue growth potential, more banks expect to improve profitability and overall financial performance

European banks are looking with moderate optimism to the next six months, according to the EY report - European Banking Barometer. Although the credit demand is expected to grow in several sectors and segments of customers, banks will be more restrictive in financing them and, in particular, the sectors of construction and real estate.

Robert Cubbage, EY EMEIA Leader for Banking and Capital Markets, comments:
“There has been a subtle shift in confidence in the last six months and the overriding sentiment from the European banking industry is now one of cautious optimism. Cost-cutting, the regulatory agenda and loan loss provisions all continue to cause the banks headaches but, for the first time in years, banks are predicting that they will see increased demand across most of their business lines. This is one of the most promising signs that the industry may well be on the road to recovery, but banks’ optimism is dependent on continued confidence in the economy and remains vulnerable to economic set-backs.”

Gelu Gherghescu, Assurance & Advisory partner, EY Romania considers that: “Although, for now, the study does not cover Romania, the results may be relevant for the local banking sector as approximately 85% of total banking assets are held by subsidiaries of European banks and some of the identified developments will have implications for these subsidiaries”.


Banks will continue to wean themselves off of central bank funding
Forty-five percent of all respondents are confident that they will be able to improve their funding mix this year. Less than 25% expect to access central bank funding programs and 39% of banks expect to be better able to repay these funding schemes. However, responses across Europe are not all so optimistic; 50% of banks in Italy, 42% in France, and 40% in Spain all expect to have to increase their access to central bank funding.

Banks will continue to deleverage
Half of respondents say they expect to decrease the value of assets in the next six months. Approximately 35% of them expect to sell assets.

„On the other hand, 25% of banks are considering the acquisition of assets in the next six months compared to only 18% last fall, which shows that some bankers can afford to take into consideration growth opportunities" said Gelu Gherghescu.

A third of banks still expect an increase in credit risk provisions
Increased credit risk provisions fades, only 32% of banks anticipating an increase in reserves over the next six months compared to 44% in the fall of 2012. However, while in the United Kingdom, Switzerland, and Austria losses from credit risk seem to have stabilized, in Poland and Spain more than 50% of banks expect increase in provisions during the next six months.

Cost cutting and compliance with post-crisis changes of regulations continue to be more important than growth
Reduction cost programs began to show their benefits, more banks than in the fall of 2012 expecting an improvement of profitability and financial performance.

„As it was expected, European banks continue to focus on cost cuts, mainly in response to the limited potential of revenue growth, while the emphasis changes from tactical measures to strategic programs such as process optimization. New product development and investments in the technology required to develop relationships with clients still remain in the second half of banks’ priority list” said Gelu Gherghescu.

SMEs lending on the rise, but for construction and real estate restrictions persist
For construction and real estate, projections are not positive. Banks confirmed introduction of extra restrictions in lending policies for the two sectors six months ago, but it seems this follows for most industry sectors. However, banks ease their lending policies for SMEs in all countries included in this study, except for Poland, the Nordic countries and Spain. This is a sign that European policies to boost SMEs lending are paying off.



Better prospects for most business lines, also due to an increasing demand in many customer segments
The best forecasts are in retail and private banking. After a difficult 2012, it is estimated that investment banking activity will register one of the best evolutions.

“Regarding the banking sector in Romania, deleveraging at European banking group level will contribute to stagnation of local lending. In addition to the situation in Europe, banks from Romania still face a lock of consumers’ and decision makers’ confidence, combined with clients’ lower credit capacity. Unfortunately, loan stagnation could affect banks beyond the direct effect in the balance sheet or income from interest, as without sustained credit growth, it is difficult to expect a short-term reversal of non-profitable loans and asset value guaranteeing such loans” said Gelu Gherghescu.

***

About European Banking Barometer
European Banking Barometer is a biannual study that surveys 250 banks across Europe, such as banks active in Austria, Belgium, France, Germany, Italy, Holland, Nordic countries, Poland, Spain, Switzerland and Great Britain.

About EY Romania
EY is one of the world's leading professional services firms with approximately 167,000 employees in 700 offices across 140 countries, and revenues of approximately $24.4 billion in 2012. Our network is the most integrated at global level and its vast resources allow us to help our clients benefit from every opportunity. In Romania, EY has been a leader on the professional services market since its set up in 1992. Our over 450 employees in Romania and Moldova provide seamless assurance, tax, transactions, and advisory services to clients ranging from multinationals to local companies. Our offices are based in Bucharest, Cluj-Napoca, Timisoara, Iasi and Chisinau. From 1 July 2013, Ernst & Young becomes EY, the logo has been modified in response to this change and the company's new tagline becomes "Building a better working world". The new visual identity reflects the new strategy of EY, Vision 2020. For more information, please visit www.ey.com.

Muted optimism as European banks continue their rehabilitation

 A third of banks still expected to increase credit risk provisions
 Deleveraging continues, 50% of surveyed institutions expecting to decrease their exposure
 Less than 25% of banks expect to appeal to a greater extent than last year to central bank funding and nearly 40% expect to repay these programs in the next 6 months
 Despite the difficult economic environment and limited revenue growth potential, more banks expect to improve profitability and overall financial performance

European banks are looking with moderate optimism to the next six months, according to the EY report - European Banking Barometer. Although the credit demand is expected to grow in several sectors and segments of customers, banks will be more restrictive in financing them and, in particular, the sectors of construction and real estate.

Robert Cubbage, EY EMEIA Leader for Banking and Capital Markets, comments:
“There has been a subtle shift in confidence in the last six months and the overriding sentiment from the European banking industry is now one of cautious optimism. Cost-cutting, the regulatory agenda and loan loss provisions all continue to cause the banks headaches but, for the first time in years, banks are predicting that they will see increased demand across most of their business lines. This is one of the most promising signs that the industry may well be on the road to recovery, but banks’ optimism is dependent on continued confidence in the economy and remains vulnerable to economic set-backs.”

Gelu Gherghescu, Assurance & Advisory partner, EY Romania considers that: “Although, for now, the study does not cover Romania, the results may be relevant for the local banking sector as approximately 85% of total banking assets are held by subsidiaries of European banks and some of the identified developments will have implications for these subsidiaries”.


Banks will continue to wean themselves off of central bank funding
Forty-five percent of all respondents are confident that they will be able to improve their funding mix this year. Less than 25% expect to access central bank funding programs and 39% of banks expect to be better able to repay these funding schemes. However, responses across Europe are not all so optimistic; 50% of banks in Italy, 42% in France, and 40% in Spain all expect to have to increase their access to central bank funding.

Banks will continue to deleverage
Half of respondents say they expect to decrease the value of assets in the next six months. Approximately 35% of them expect to sell assets.

„On the other hand, 25% of banks are considering the acquisition of assets in the next six months compared to only 18% last fall, which shows that some bankers can afford to take into consideration growth opportunities" said Gelu Gherghescu.

A third of banks still expect an increase in credit risk provisions
Increased credit risk provisions fades, only 32% of banks anticipating an increase in reserves over the next six months compared to 44% in the fall of 2012. However, while in the United Kingdom, Switzerland, and Austria losses from credit risk seem to have stabilized, in Poland and Spain more than 50% of banks expect increase in provisions during the next six months.

Cost cutting and compliance with post-crisis changes of regulations continue to be more important than growth
Reduction cost programs began to show their benefits, more banks than in the fall of 2012 expecting an improvement of profitability and financial performance.

„As it was expected, European banks continue to focus on cost cuts, mainly in response to the limited potential of revenue growth, while the emphasis changes from tactical measures to strategic programs such as process optimization. New product development and investments in the technology required to develop relationships with clients still remain in the second half of banks’ priority list” said Gelu Gherghescu.

SMEs lending on the rise, but for construction and real estate restrictions persist
For construction and real estate, projections are not positive. Banks confirmed introduction of extra restrictions in lending policies for the two sectors six months ago, but it seems this follows for most industry sectors. However, banks ease their lending policies for SMEs in all countries included in this study, except for Poland, the Nordic countries and Spain. This is a sign that European policies to boost SMEs lending are paying off.



Better prospects for most business lines, also due to an increasing demand in many customer segments
The best forecasts are in retail and private banking. After a difficult 2012, it is estimated that investment banking activity will register one of the best evolutions.

“Regarding the banking sector in Romania, deleveraging at European banking group level will contribute to stagnation of local lending. In addition to the situation in Europe, banks from Romania still face a lock of consumers’ and decision makers’ confidence, combined with clients’ lower credit capacity. Unfortunately, loan stagnation could affect banks beyond the direct effect in the balance sheet or income from interest, as without sustained credit growth, it is difficult to expect a short-term reversal of non-profitable loans and asset value guaranteeing such loans” said Gelu Gherghescu.

***

About European Banking Barometer
European Banking Barometer is a biannual study that surveys 250 banks across Europe, such as banks active in Austria, Belgium, France, Germany, Italy, Holland, Nordic countries, Poland, Spain, Switzerland and Great Britain.

About EY Romania
EY is one of the world's leading professional services firms with approximately 167,000 employees in 700 offices across 140 countries, and revenues of approximately $24.4 billion in 2012. Our network is the most integrated at global level and its vast resources allow us to help our clients benefit from every opportunity. In Romania, EY has been a leader on the professional services market since its set up in 1992. Our over 450 employees in Romania and Moldova provide seamless assurance, tax, transactions, and advisory services to clients ranging from multinationals to local companies. Our offices are based in Bucharest, Cluj-Napoca, Timisoara, Iasi and Chisinau. From 1 July 2013, Ernst & Young becomes EY, the logo has been modified in response to this change and the company's new tagline becomes "Building a better working world". The new visual identity reflects the new strategy of EY, Vision 2020. For more information, please visit www.ey.com.

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