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Early signs of economic confidence seen in 1H13 are more stronger now. The ECB has maintained low interest rates resulting in some pockets of economic growth in Europe. The Eurozone GDP grew 0.3% in the 2Q13. As a result, respondents are decidedly more optimistic on their country’s economic prospects - 56% of respondents were optimistic, compared to 26% in our previous barometer.
Moreover, respondents believe that impact of the sovereign crisis is lesser than at 1H. Banks have also undergone a sustained period of restructuring focusing on delveraging, hiving off toxic assets etc. So not only have the economic conditions improved but banks are themselves in a more healthy position. This has translated into optimism about their own prospects with 60% believing performance will pick up in the coming six months.
As a consequence, banks have started to focus on growth activities – most importantly freeing up lending. Also of importance is that the credit demand should improve. PMI numbers are on the rise across most countries in Europe suggesting capex plans will increase. So on the corporate side, credit restrictions will ease on media, retail and manufacturing apart from SME, healthcare. Debt issuance will also improve but equity will remain constrained given still low valuations.
On the consumer side things are looking better as well. Banks are optimistic on personal investment products as consumers look to improve personal returns. Hinting at signs of an improvement in future consumer spending – the outlook for personal loans and credit cards is slightly better than our previous barometer.
This is not to say that all issues are over. Challenges remain. Regulation and reputational risk are high on the list of priorities as banks struggle with the dual challenge of meeting with Basel III norms and lower their legal risk from activities. Revenues are sluggish and cost cutting is still the main tool to achieve profitability. This means that headcount reduction will continue. Even in areas such as retail banking, where banks expect significant growth, they are looking to reduce headcount. While this may be surprising at first, it further underscores their aim to improve employee productivity.
Provisions will still rise as NPLs continue to be high and current reserves in Spain and Italy do not meet requirements. 33% of banks still expect loan loss provisions to increase. In countries such as Spain and Italy this is more pronounced with 61% and 50% expecting an increase respectively.
What is also clear is that further bank reconstruction will not be through consolidation now. Banks do not expect further banking industry consolidation to happen in the immediate year. This is mainly because they have undergone a significant amount of restructuring and consolidation already. They instead expect most M&A within the industry to take a 3 year time horizon. Future consolidation will move away from selling of toxic assets to acquiring businesses that will add to their franchise.
T11 refer total column for Europe
T17 refer total column for Europe
T149 refer total column for Europe
T146 refer total column for Europe