Non-performing loans put pressure on Eurozone banks

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Banks pose less of a systemic threat to the economy, but they are not healthy enough to drive growth. To help ensure the longer-term health of the Eurozone banking system, the framework for a full banking union needs to be completed according to Ernst & Young Eurozone Financial Services Forecast 2013 (EEFSF) released yesterday. Average loan-to-deposit ratios have fallen, but still have some way to go. Before the crisis, ratios were as high as 124 percent in 2006. They have now come down to 111 percent, but are likely to fall to 106 percent by the end of 2013 and 104 percent in 2016. Although this will reduce vulnerability to wholesale funding drying up, loan-to-deposit ratios would still be significantly higher than the current average ratio of 70 percent for commercial banks in the United States. “We expect a rise in non-performing loans”, E&Y analysts note. Credit quality in the euro region has deteriorated more sharply than expected, pushing non-performing loans to a euro-era high of 7.6 percent of outstanding loans next year. But they should fall back to 5.6 percent in 2014 as economic conditions in the region improve. The weak economy and uncertain policy environment continue to dampen confidence. Banks will be reluctant to lend and demand for credit is expected to remain subdued this year. Following an estimated 1.3 percent contraction of loans to nonfinancial businesses and households in 2012, E&Y expect lending to the private sector to fall by a further 0.2 percent in 2013. Positive growth of 2.9 percent is then expected in 2014. Credit contraction will be particularly severe in the peripheral economies, where fiscal austerity is dampening loan demand and credit conditions are tightest.