Bad loans and regulation will squeeze eurozone banks in 2013, says Ernst & Young

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MURKY RECOVERY AHEAD: Photo shows Ernst & Young corporate office in Berlin, Germany. The group said that while the economic forecast for the eurozone in 2013 showed painful progress towards stability, eurozone banks and insurers would face another difficult year ahead.

SINGAPORE: While the economic forecast for the eurozone in 2013 shows painful progress towards stability, eurozone banks and insurers will face another difficult year.

The north-south divide will become more entrenched this year, while the outlook for lending in northern markets is slowly improving, the outlook for southern markets is bleak as banks contend with a recession-driven glut of non-performing loans and continued regulatory pressures, according to the Ernst & Young Eurozone Financial Services Forecast released yesterday.

The report said the outlook for non-performing loans had worsened again as credit quality in the eurozone had deteriorated more sharply than expected.

Non-performing loans are expected to have hit 6.8 per cent in 2012 and will reach a Euro-era high of 7.6 per cent in 2013 (up one per cent from the previous forecast).

Andy Baldwin, Financial Services Leader for Europe, Middle East, India and Africa at Ernst & Young, said, “While the economic outlook is marginally better than at the beginning of last year, financial services firms — in particular banks — will be hit by the cumulative effect of five years of poor economic performance, which ultimately translates into unprecedentedly high levels of non-performing loans.

“Banks are still in the process of trying to deleverage for regulatory reasons, which is made harder by the prolonged period of slow growth.

While larger banks have benefited from policy interventions, smaller and regional banks are still finding access to credit both difficult and expensive.

“As a result, the outlook for new lending to consumers and many corporates in 2013 is pretty dire,” he said.

According to the report, forecast for lending to business showed that the north-south divide was entrenched.

Banks were just two-thirds through the process of deleveraging, with 132 billion euros of further loan book shrinkage expected in 2013.

Average loan to deposit levels would have fallen from a pre-crisis peak of 124 per cent in 2006 to an estimated 111 per cent at the end of 2012, and this process has further to go, with the ratio likely to fall to 104 per cent in 2016.

As a consequence loan books remain under pressure.

After significant decreases in 2011 and 2012, consumer credit is forecast to decrease again slightly across the eurozone by 1.2 per cent, while the Consumer Price Index is expected to increase by 1.9 per cent.

However, consumer lending is expected to pick up in 2014, when it is forecast to increase by 1.5 per cent as the economy returns to slow growth.

Marie Diron, senior economic adviser to the forecast report, said, “The price of goods and services across the eurozone has been steadily rising while lending to consumers had shrunk for two consecutive years, hitting households hard, although the consumer squeeze should start to ease later this year.

“The outlook for lending to businesses paints a more complicated picture, and indicates that the divide in fortunes for the northern and southern Eurozone nations is now becoming entrenched.”

The outlook for lending to business in 2013 shows lending is to increase in France, Germany and the Netherlands by one to 2.5 per cent and decrease in Italy by 0.5 per cent and Spain by four per cent.

However, comparing the 2011 figures against the outlook for 2013 shows that the north-south divide is becoming entrenched.

Lending in France, Germany and the Netherlands had increased by 18 billion euros, 72 billion euros and 28 billion euros respectively over two years, whereas lending in Italy would have fallen by 43 billion euros and in Spain by 100 billion euros over the same time period.

Diron added that the cumulative effect of a lack of funding for business in the southern economies would exacerbate and prolong the recession in these countries.

She said growth in some markets was not foreseen until 2015 at the earliest as a result. — Bernama