The FINANCIAL — EY’s 7th European Banking Barometer (EBB) survey has revealed widespread pessimism amongst Europe’s bankers over the outlook for their industry in the year ahead. Only 52% of the 250 senior bankers across 12 European markets expect performance to improve over the coming 12 months down from 56% last year and the lowest level since the financial crash in 2012.
This year’s EBB interviewed 250 senior bankers across Austria, Belgium, France, Germany, Ireland, Italy, the Netherlands, the Nordics, Poland, Spain, Switzerland and the UK. In each market the respondent represent financial institutions covering at least 50% of banking assets.
Marie-Laure Delarue, EY’s EMEIA Banking & Capital Markets Leader, says:
“Low economic growth within Europe and the economic slowdown in some of Europe’s key trading partners, combined with a difficult geo-political situation across the Middle East, South America and parts of Africa leave bankers with few reasons to be cheerful. Opportunities for growth are few and far between and local regulatory pressures remain high and are evolving.
“The drop in confidence we’ve seen in our Barometer this year means the gap between those expecting their financial performance to strengthen and those expecting it to weaken has fallen to only 29% – the lowest since 13% was recorded in 2012 and well below the 48% we saw in 2013. It’ difficult to see what will change soon to lift bankers out of their collective negativity.”
Revenue growth, cost reduction and return on equity (ROE) expectations down on 2015
Unless banks exceed the 1.62% revenue growth and 0.90% reduction in costs they anticipate, we estimate they will only see improvement in average ROE of 0.47% – less than half of the average 1.06% anticipated by the respondents.
However, expectations of performance are sharply divided across different markets. For example, in Ireland, Spain and the UK, bankers expect ROE to increase by about 2.5%, while the expectation in Poland is for a 3% decline.
Headcount is expected to fall as banks reprioritize cost reduction.
54% of bankers expect headcount to fall in 2016, compared with 43% in our last survey, with reductions, once again, predicted in operations and IT, other head-office functions and retail banking. Ireland, the Nordics and Switzerland are the only markets where more respondents expect overall headcount to increase rather than decrease.
Bankers anticipate an increased emphasis on cost reduction particularly through short-term cost cutting. Streamlining their processes is now a key priority for 61% of banks, up from 57% last year. Perhaps more significant is the increased emphasis on minimizing all non-essential expenditure and cutting costs, a priority for more than half of respondents, compared with just 37% in 2015.
Karl Meekings, EY’s Global Banking & Capital Markets Lead Analyst, says:
“We expect to see an increased emphasis on efficiency this year with streamlining processes remaining the most important cost-reduction initiative. But notably, 51% of respondents now see minimizing non-essential spend as critical, compared with just 37% in 2015.
“Banks will need to invest to address compliance and risk management issues, which continue to have a significant financial impact on institutions. Enhancing risk management remains the top priority for banks, with other risk and regulation issues, such as capital ratios, compliance with capital market regulations, and managing reputational risk still ranking highly.”
The impact of FinTech and cyber issues continues to loom large
On the technology side, cybersecurity has also gained greater prominence for bankers across Europe, with 56% citing it as important, up from 48% last year. Cybersecurity and combating financial crime will remain a key priority, particularly for banks in Belgium, France, Ireland, Netherlands, Poland and UK.
Attention also continues to turn to FinTech. Investing in customer-facing technology is a key priority for 53% of respondents (particularly this year for bankers in Belgium, Germany, Italy and the Nordics), compared with just 43% in 2015. Twenty three per cent (23%) of respondents expect partnering with FinTech firms to be important for their institution.
Optimism is there for individual business lines and a broad loosening of lending policies in both the corporate and consumer sectors
While bankers have been optimistic for some time about the outlook for areas such as private banking and wealth management, there’s a marked pickup this year in their expectations for investment banking and transaction advisory services. This points to a bright outlook for M&A, reflecting the impact on some industries from factors such as the recent market turbulence and plunging oil prices.
While this may again appear surprising, given the relatively high level of market uncertainty, it reflects the fact that banks across Europe are generally in a better capital position than they have been for some time. It seems that, with stronger common equity Tier 1 (CET1) capital ratios – up by an average of 70bps from last year – and impact of the European Central Bank’s quantitative easing program, banks are feeling more freedom to lend.
More consolidation to come?
85% of respondents now anticipate some industry consolidation in the next 12 months. Most of this activity is expected to be small in scale, suggesting that banks will continue only to make disposals or acquisitions of small books of business that are closely aligned to their core strategy. However, the pace of consolidation may now be picking up. The greatest consolidation is anticipated in markets where banks were shown to have capital shortfalls or where there is overcapacity, including in Austria, Germany, Italy and Poland.
Beyond industry consolidation, partnerships remain the most popular route to inorganic growth in most markets. Joint Ventures are favoured for those looking to invest in new markets across Europe, although Belgium Ireland and Spain buck this trend with bankers in those markets expecting to see acquisitions instead.
Marie-Laure added:
“It’s good to see optimism in the banking sector in some business lines and some loosening of lending lines. The challenge for the year ahead for many institutions will be how they protect and grow their market share. Do they stand alone, make strategic acquisitions, or partner with other institutions or innovative firms? Which new markets are both economically and politically stable enough for investment? Can new growth be found in existing markets? These are the questions that will be keeping Europe’s bankers awake at night – it will be interesting to see how they plan to steer the rocky road ahead.”
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