This year the eurozone will experience annual GDP growth for the first time since 2011, but at just 0.9 per cent the growth will not be strong enough to support a level of uplift in financial services that will drive further economic recovery according to the EY Eurozone Financial Services Forecast (EEFSF). The growth in business lending has been revised significantly down, with €211bn less to be lent in 2014 than previously forecast in October. Consumer credit is also flagging – it shrank by €29bn in 2013, as households felt pressure to reduce their debt in the face of high unemployment. The forecast for consumer lending in 2014 has dropped by €26bn and consumer credit will not recover to 2012 levels until 2016.

The outlook is more balanced for financial services sectors outside of banking. AUM will continue to rise, hitting €5 trillion for the first time this year. However, low economic growth, low inflation and historically low interest rates will limit the scope for further gains.

Lending forecasts in the eurozone reflect the impact of non-performing loans

The low economic growth predicted for 2014 has negatively affected the forecast for bank lending. A downgrade this quarter to the forecast for business investment combined with a more cautious attitude from banks towards lending, means that business lending is now expected to grow by just 1.6 per cent in 2014, instead of 3.8 per cent as previously forecast. That equates to €211bn less lending to businesses. Consumer credit forecasts have also fallen significantly.

Robert Cubbage, Banking and Capital Markets leader for EY in Europe, Middle East, India and Africa (EMEIA), comments: “While projections for overall lending over the next few years remain positive in most markets, they have fallen significantly since the last forecast. The eurozone’s slow recovery from recession is one driver of weak lending growth, but the growing realization of the asset quality review’s (AQR) likely effects is also a major factor. Applying common EU standards will inevitably create shocks, and it is no secret that a number of eurozone banks are already increasing their provisioning. Balancing the demands of the AQR with the need to deliver growth and support business lending is definitely going to be a challenge for the banks this year.”

Andy Baldwin, global head of financial services at EY, adds: “With the benefit of hindsight, the timing of the AQR programme, coming alongside such a sluggish recovery, is less than ideal. Economic recovery depends on a banking system that is not only well capitalised but also able to extend credit where it is needed. Right now Europe’s SMEs need it more than most but banks will struggle to provide it this year.”

The forecast for 2014 shows that the prolonged macroeconomic differences between countries in the eurozone is having a noticeable effect on the ability of financial services industries in those countries to support economic recovery.

The lending forecasts in the eurozone reflect the impact of non-performing loans (NPLs). The ECB’s AQR appears to have triggered an early recognition of NPLs in Italy; bad loans were higher than expected in the first three quarters of 2013 and are estimated to have peaked at 11.8 per cent of all loans at the end of the year. In Spain, there has already been a significant review of balance sheets and so no significant negative surprise is expected from the AQR, however very high unemployment (26.6 per cent at the end of 2013) means that NPLs will continue to rise during 2014, when they are expected to peak at 13.6 per cent. In contrast, record low unemployment, robust growth and sound corporate balance sheets in Germany, means that NPLs should fall steadily from 3.2 per cent in 2013 to 2.8 per cent in 2017.

Sign up to our free newsletters

Get the best updates straight to your inbox:
Please select at least one mailing list.

You can unsubscribe at any time by clicking the link in the footer of our emails. We use Mailchimp as our marketing platform. By subscribing, you acknowledge that your information will be transferred to Mailchimp for processing.