23 June 2014

Ernst & Young: At least 22 European banks expect to raise capital following the AQR

Despite this, European banks are optimistic about their growth and financial performance this year, and are expecting to increase both lending to the real economy and pay to their employees.

Steven Lewis, Lead Global Banking Analyst at EY, says: “On the face of it, squaring banks’ optimism on recovery and growth with their expectations around having to raise further capital is difficult. But if you look more closely at the results, it’s clear that there is increasing divergence between the strong and the weak. Stronger banks are expecting their financial performance to improve and to be able to increase lending and pay this year as a result, while the weaker banks are still concerned about capital levels.

Thirty percent of Eurozone banks may need more capital

Across the Eurozone markets surveyed, on average about 30% of banks cannot rule out further capital raising post-AQR. Across the whole sample of European banks, a significant minority of banks (8%) fully expect to have to raise further capital following the AQR and a further 20% think they might still need to raise capital.

The survey was conducted in March 2014 and, by the end of polling (4 April), six Eurozone banks had already executed a capital raising initiative this year. By 4 April 2014, Eurozone banks had raised US$11b compared to US$2b for the same period in 2013. Since then another 10 banks have announced plans to raise capital prior to the completion of the AQR. In total this year, European banks have already raised US$35b of equity, which is 70% more than was raised in the same period in 2013.1

Market divided on loan-loss provisions

Thirty percent of banks also expect to have to raise provisions this year. Banks in Spain and Austria are most likely to raise provisions: banks in Spain have lingering concerns about sovereign debt problems and have been required to revalue their real-estate portfolios; banks in Austria are least confident about the economy and are more exposed to Eastern Europe. However, the improving economic conditions mean that 23% of banks expect to be able to release provisions in the next six months, which is an improvement on H2 2013, when just 14% expected to be able to release provisions.

AQR pushing out the time frame for any major European banking consolidation

When asked in 2012 if they expected major consolidation within the industry, 50% of banks surveyed said they expected consolidation within the medium to long term. However, major consolidation in the market has yet to materialize and banks in most markets expect any major consolidation to still be three years away. Just 7% of respondents anticipate large-scale consolidation in the next 12 months, but 63% expect medium- to large-scale consolidation in the next three years.

Overall headcount continues to fall but pay is expected to increase

Headcount continues to fall but the pace of cuts is slowing in most countries. A significant number of banks expect further job losses in Austria (53% of banks), France (40% of banks) and Switzerland (35% of banks), where cost-cutting remains a key concern. However, in the Nordics and the UK, where institutions are beginning to focus on growth, nearly half of respondents expect to increase headcount. The greatest cuts continue to be in head-office, operations and IT, whereas banks are recruiting in compliance and growth areas such as private banking.

Most bankers expect their pay to remain relatively level, but 28% expect pay to increase. A quarter of respondents expect pay increases of 2% or more in 2014 – which is above the current rate of inflation in the Euro area and the average wage inflation in Europe (currently 1.5%). At the top end of the scale, 4% of respondents expect double-digit pay increases.

Press release EY

EY EBB 1H2014

City A.M article

Article_FT (FT subscription required)

WSJ article (WSJ subscription required)

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