Bruising Short-term Outlook for Eurozone Financial Services and Business Balanced by Moderate Long-term Prospects

Michelle Remo, “Big 4″ observer
March 29, 2012 /

The Ernst & Young Eurozone financial services forecast (EEFS) released today highlights that while the Greek restructuring and the European Central Bank’s Longer-Term Refinancing Operation (LTRO) have calmed the markets at least temporarily the weakening economy will continue to put pressure on financial services companies across Europe and beyond.

The forecast for Eurozone GDP has been downgraded again this month, with a contraction of 0.5% now anticipated in 2012. As a result, non-performing loans in the Eurozone are likely to rise to the highest level since the creation of the common currency in 1999, and lending to business is predicted to fall by 3.4% – a sharper contraction than during the financial crisis. Asset management and life and pensions face a better prognosis, with assets under management (AUM) predicted to grow by 6% this year, and recover to pre-crisis levels by 2015.

Andy Baldwin, head of financial services Europe, Middle East, India and Africa at Ernst & Young, comments: “In the longer-term the outlook is moderate. The LTRO has calmed the markets and given banks time to build capital via deleveraging, increasing retained profits and selective asset sales when the right buyer is found. Total banking assets and loans are set to recover to 2010 levels by 2015, as are insurance premiums, and AUM for the asset management industry are set to recover to pre-crisis levels.

“In the short term, however, financial services in the Eurozone, and those businesses that they work with, will continue to feel the pinch of a weakening economy trapped in a low growth, low investment cycle. ”

Due to the weakening economy, non-performing loans in the Eurozone have been growing steadily as a proportion of all loans since the onset of the financial crisis and the forecast predicts that this year non-performing loans will rise above 6% of total loans, which would be the highest level since the creation of the Euro in 1999.

Marie Diron, Economic Advisor to Ernst & Young Eurozone financial services forecast said: “The unrelenting rise of non-performing loans is an under-acknowledged threat to banks’ capital levels. While the world’s attention is focused on losses on sovereign debt holdings, non-performing loans are creeping up on banks, as the Eurozone businesses they have lent to struggle against the weakening economy.”

Bank loans predicted to contract more sharply than during the financial crisis
The EEFS predicts that the economy will contract by 0.5% this year, driving down demand for new loans. At the same time higher capital requirements have dampened banks’ appetites for lending.

The sharp downgrade to the 2012 GDP forecast over the last quarter, from +0.1% to -0.5%, and tightening credit conditions mean that the forecast is for total loans to non-financial corporate and households to fall by €211b this year, a 2.3% decline on 2011 and a significant downward revision from the EEFS prediction in December of a contraction of 0.9%. Lending to businesses across the Eurozone is expected to contract even more sharply in 2012, by 3.4%.

Marie said: “While the European Banking Authority claims that banks’ plans to meet the new capital targets by June should not negatively impact lending to the real economy, the EEFS is sceptical. The LTRO may have saved the Eurozone from a broad credit crunch, but deleveraging is far from over.

“Our prediction of a 2.3% contraction in total lending represents a deeper contraction of lending to the real economy than occurred in the direct aftermath of the financial crisis in 2009. The contraction of lending to businesses is in part a result of companies having hoarded cash and deleveraged sharply since the crisis, which shows little appetite for inward investment and casts doubt on the ability of the Eurozone economy to grow.”

Asset Management recovering

Total assets under management (AUM) for UCITS and non-UCITS declined by 8.5% in 2011, this was due to a large decrease in AUM for Eurozone UCITS, which was driven by reduced investor confidence as a result of the sovereign downgrades.

Inflows into shorter-term funds, including money markets also slowed last year as competition from banks for retail deposits increased. The forecast expects this precautionary withholding of retail investment from the Eurozone to start to reverse in the second half of 2012. AUM for UCITS and non-UCITS is predicted to rise by 6.1% in 2012, and to average 8% growth per annum during 2013-15. AUM will rise above its pre-crisis peak by the end of 2015.

Marie commented: “These forecasts for UCITS and non-UCITS are largely representative of AUM across the asset management industry. Pension funds have increased their share of total AUM in the last 18 months, in part benefitting from the flight from Eurozone UCITS, and beyond 2014 we predict that the long-term austerity measures being put in place will drive the funding crisis for public pensions and healthcare. This is likely to result in the asset management and life and pensions industries supplementing or replacing state provisions for Europe’s ageing population.”


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