Gold Magazine April - May 2013, Issue 25 | Page 70

financial services

Still
{money}

On Track

Cyprus has been challenging but the eurozone financial services
industry still appears to be ready to turn the corner

T

he Cypriot debt
crisis is a timely
reminder that
the problems in
the eurozone are
not over and that
economic recovery for the region
is on a fragile, uneven trajectory, but the
Eurozone Financial Services Forecast predicts
that, while localized problems can’t be ruled
out, the collective pain for the financial services
sector in the eurozone is almost over.  Many
key indicators for the sector are expected to return to modest growth in the next 18 months,
and banks in particular should be in a position
to start lending and help drive the economic
recovery in 2014. 
Andy Baldwin, Head of Financial Services, Europe, Middle East, India and Africa
(EMEIA) at Ernst & Young comments: “The
market response to the Cypriot debt crisis was
actually fairly encouraging in that it demonstrated that the major European economies are
now quite well insulated from national crises
in smaller states.
“The financial services sector remains the
principal mechanism for distributing investment capital to the wider economy and it
now needs to play a vital role in the economic
recovery. There is a sense that the industry as a
whole is close to turning a corner, however the
forecast is divided between north and south,
and also between systemically important
financial institutions (SIFIs), which continue
to strengthen, and smaller national banks, for
whom the near-term outlook is less certain.” 
After contracting by €856 billion last year,
total assets in the eurozone banking sector are

forecast to fall by €500 billion in 2013 before
returning to growth in 2014. Total assets have
already broadly stabilized in Germany, France
and the Netherlands, while Italy and Spain are
expected to follow next year.
Marie Diron, Senior Economic Adviser to
the Eurozone Financial Services Forecast says:
“Although on aggregate deleveraging in the
eurozone will continue at some pace this year,
we believe the most destructive phase has now
passed and that banks in the stronger economies have already turned the corner. 2013
should be the last year of asset shrinkage,
and 2014 is looking much healthier.”
Lending to businesses and households fell
1.7% across the eurozone last year and this
contraction is expected to continue in 2013,
but at a slower rate of 0.5%. 
There is still a pronounced north-south
divide in the cost of bank borrowing and, as
a result, the peripheral economies will experience a more marked contraction in lending
this year. Lending in Spain is forecast to contract by 5.1% in contrast to positive growth
of 0.8% in Germany and 0.6% in France.
However, total lending across the eurozone
is expected to start to grow again in 2014 at a
rate of 2.9%, which includes a modest (0.9%)
return to growth in Spain.
Non-performing loans will peak this year,
driven by peripheral economies
As a result of the rise in non-performing
loan (NPL) rates in the peripheral economies,
NPLs in the eurozone will peak at a euro-era
high of 7.2% this year, up from an estimated
6.7% at the end of 2012. NPL rates are already declining in France, Germany and the
Netherlands this year but will climb to a peak
of 10.2% in Italy and are forecast to reach

70 Gold the international investment, finance & professional services magazine of cyprus

Banks should be in
a position to start
lending and help
drive the economic
recovery in 2014
12.8% in Spain, notwithstanding
the recent transfer of problematic
assets to SAREB.
Interest rate rises remain an outside risk
but insurers need to plan their response
Concerns that the economy could gather
pace more quickly than anticipated under
Ernst & Young’s baseline forecast, causing the
European Central Bank (ECB) to increase
rates more quickly, should be taken seriously
by insurers. If the eurozone does not shrink
this year and grows by 1.7% in 2014, which
is faster than the 1.1% baseline forecast, inflation would then hit 2.8% by the end of 2014,
causing the ECB to increase interest rates from
0.75% to 1.25% in 2015, rather than keep
them on hold until the middle of 2017. Tenyear eurozone government bond yields would
rise from 3.4% in mid-2014 to 4.7% by the
end of 2015.
Andy Baldwin says: “Despite the low probability of interest rates rising, the effects are
sufficiently large to warrant scenario planning
by insurance companies. The rapid rise in
interest rates and higher financial stress would
hit insurers through their bond-heavy balance
sheets.  Insurer’s core business would also be
affected with lapse rates likely to rise, for example, as customers switched into alternative
products offering higher yields, and new business would suffer as the economy slows.”