Banks 'only two-thirds of the way' through deleveraging

Banks in the eurozone are only two-thirds of the way through deleveraging, which means they face another difficult year, Ernst & Young said

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In the winter edition of its outlook for financial services, the consultancy firm predicted that 2013 will mean a further shrinkage of eurozone banks’ loan book of 132 billion euros ($171.6 billion).

“The north-south divide will become more entrenched this year,” Ernst & Young wrote in their forecast.

“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.”

The health of banks in the eurozone has been intensely watched by policy makers in emerging markets, with Central and Eastern European countries most affected by Western banks’ problems.

Credit quality in the eurozone has deteriorated “more sharply than expected,” with non-performing loans expected to hit a euro-era high of 7.6% this year, from a forecast 6.8% in 2012.

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“Banks are still in the process of trying to deleverage for regulatory reasons, which is made harder by the prolonged period of slow growth,” Andy Baldwin, financial services leader for Europe, Middle East, India and Africa at Ernst & Young, said in a statement.

“While larger banks have benefitted from policy interventions, smaller and regional banks are still finding access to credit both difficult and expensive. As a result, the outlook for new lending to consumers and many corporates in 2013 is pretty dire.”

Loan to deposit levels will fall to an estimated 111% in 2012 from the pre-crisis peak of 124% in 2006, and are seen decreasing further to 106% this year, 105% in 2014 and 2015 and to 104% in 2016.

Consumer credit is seen decreasing again by 1.2% across the eurozone, but it is expected to pick up by 1.5% next year, when the economy is likely to return to slow growth, Ernst & Young said.

For businesses, lending is slated to increase by between 1% and 2.5% in France, Germany and the Netherlands and decrease by 0.5% in Italy and by 4% in Spain.

“The cumulative effect of a lack of funding for business in the southern economies will exacerbate and prolong the recession in these countries. Growth in some markets is not foreseen until 2015 at the earliest as a result,” Marie Diron, senior economic adviser at Ernst & Young Eurozone Financial Services Forecast, said.