Ernst & Young: Bad loans and regulation will squeeze Eurozone

By Rob Starr, Content Manager, Big4.com

While the economic forecast for the Eurozone in 2013 shows painful progress towards stability, Eurozone banks and insurers will face another difficult year. The north-south divide will become more entrenched this year; while the outlook for lending in northern markets is slowly improving, the outlook for southern markets is bleak as banks contend with a recession-driven glut of non-performing loans and continued regulatory pressures, according to the Ernst & Young Eurozone Financial Services Forecast (EEFSF) released recently.

Banks are just two-thirds through the process of deleveraging, with €132b of further loan book shrinkage expected in 2013. Average loan to deposit levels will have fallen from a pre-crisis peak of 124% in 2006 to an estimated 111% at the end of 2012, and this process has further to go, with the ratio likely to fall to 104% in 2016. As a consequence loan books remain under pressure.

The outlook for lending to business in 2013 shows lending is to increase in France, Germany and the Netherlands by 1-2.5% and decrease in Italy by 0.5% and Spain by 4%. However, when comparing the figures over a two-year period (2011 figures against the outlook for 2013) shows that the north-south divide is becoming entrenched. Lending in France, Germany and the Netherlands has increased by €18b, €72b and €28b respectively over two years, whereas lending in Italy will have fallen by €43b and in Spain by €100b over the same time period.