The winter edition of EY’s Outlook for financial services finds that the slow pace of the Eurozone recovery, combined with on-going regulatory pressures, may impact the financial services industry’s ability to expand in 2014.
“The run-up to Christmas and the start of 2014 proved to be a busy time for Europe’s financial sector,” says Andy Baldwin, EMEIA FSO Regional Managing Partner. “Sadly, this was less to do with the festivities and more to do with the necessary groundwork to underpin the Eurozone’s new regulatory framework.”
While the Eurozone economy shrank by 0.5% in 2013, GDP growth is expected to be 0.9% in 2014 and 1.5% a year from 2015-17. This fragile progress – coupled with regulatory developments such as the Asset Quality Review (AQR), the completion of Solvency II and the potential revival of the Financial Transactions Tax (FTT) – will create a challenging environment for financial services in 2014.
Banks have reduced the size of their balance sheets, which were 5% smaller in 2013 than in 2012. Meanwhile, lending is beginning to improve. Mortgage lending is an area of comparative strength, with the stock of mortgages reaching a record €3.9t in 2014; however, business and consumer lending will experience more modest growth. Non-performing loans (NPLs) remain high, while the European Central Bank’s AQR will also put new demands on banks to raise capital in 2014.
Insurance profits are expected to increase but remain lower than their 2007 peak. Both life and general insurance premiums are forecast to grow in 2014-17 (by 3.3% and 2.4% per year, respectively), though high levels of unemployment across the Eurozone will continue to limit insurance prospects.
Eurozone Assets Under Management (AUMs) are forecast to pass €5t for the first time this year. Property funds are expected to benefit from improved risk appetite, while it is anticipated that equity and multi-asset funds will increase significantly in 2012-17 (by 70% and 82%, respectively). However, fund of hedge fund AUMs continue to fall.