The FINANCIAL — EY’s annual market-leading survey of the European banking industry has revealed the continent’s bankers are at their least optimistic since 2012, when the Eurozone debt crisis was at its height. Only 52% of respondents expect performance in their industry to improve in the coming year, down from 56% in 2015. The outlook amongst UK banks, in line with a growing European-wide pessimism about the sector, has fallen over the last year as risk, regulation and cost cutting dominate the agenda.
However, there are some bright spots. UK bankers anticipate growth in debt and equity market issuance in 2016, with 83% predicting a good outlook for the business line. Increased capital markets activity is expected, which could in part be attributed to the ongoing low rate funding environment coupled with confidence in UK corporate activity. Corporate and retail banking are also rated as having an improved outlook this year, with 68% and 67% of respondents respectively rating their outlook as “good” or “fairly good”, according to EY.
Corporate lending policies becoming less restrictive
Across Europe, bankers consider that lending policies to the majority of sectors will become less restrictive over the course of 2016. This positive outlook can be largely attributed to banks’ stronger capital positions and ongoing monetary easing by the European Central Bank which provides attractive long-term funding conditions to banks. In the UK, SMEs and financial services emerge as the major beneficiaries of this loosening of lending criteria and covenants.
UK bankers lead in expectation of sales of assets
UK bankers believe more than those in any other country that their institutions will be selling assets over the coming 12 months. 47% of respondents in the UK are expecting to see sales (up from 35% last year). 32% believe assets will be bought, with one in five (21%) expecting to see joint ventures across their market. The growing FinTech industry is also on bankers’ radars, with 23% of respondents saying that partnering with a FinTech will be important for their institution.
Managing reputational risk dominates UK banks’ agenda
With capital markets regulations, tax transparency, and changing remuneration structures remaining a top concern, it is not surprising that over 90% of UK bankers cite reputational risk as the most important priority for their organisation.
Cybersecurity has also gained greater prominence for bankers across Europe, with 56% citing it as important, up from 48% last year. For UK bankers, cybersecurity remains a major concern, with over 75% placing an increased emphasis on this risk, compared to a European average of 56%.
Karl Meekings, EY’s Global Banking & Capital Markets Lead Analyst, says:
“While the UK banking sector is not immune from the continent-wide sense of pessimism in the industry, the more positive outlook in the UK economy is supportive of individual business lines. The optimism felt by capital markets bankers in particular reflects enhanced corporate appetite for transformative deals, including M&A, supported by continuing low interest rates and the newly evident trend of looser lending requirements from the banks themselves.”
Cost-cutting fuels expectations of lower remuneration and reductions in headcount
Headcount reduction is likely to be at its highest since 2012, with 56% of UK bankers predicting it will occur, compared to 34% last year.
Across Europe bankers expect ongoing moderation of pay, reflecting the impact of weak business performance, as well as regulatory and shareholder pressure. UK bankers anticipate some of the greatest cuts in remuneration with only the Netherlands more bearish on levels of cuts.
Karl says:
“It is clear that banking in Europe remain in a state of adjustment, as regulatory and economic developments continue to take their toll. The UK is an exception, given the more positive outlook in that market, but pressure continues to be evident even in the UK market, especially in terms of remuneration and reputation.”
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