Consumers and small businesses’ struggle with credit payments will intensify over the next few months, according to the European Credit Risk Survey conducted by Fico, a provider of analytics and decision management technology, and Efma. In addition, bank profitability will be hurt by government austerity measures aimed at balancing national budgets.
The forecast for credit delinquencies was worse across all credit products than in Fico and Efma’s last survey, conducted in fall 2011. More than half of respondents now believe mortgage delinquencies will increase in the next six months, compared with 39% in the last survey. Credit cards presented the biggest expected deterioration for the next six months: 65% of risk managers see increased delinquency, compared with 41% in fall 2011, an increase of 58%.
Small business loans present a real concern, as 70% of risk managers foresee an increase in delinquencies. This is a sharp increase from Fico and Efma’s last survey, where 52% of risk managers predicted credit quality deterioration. In the UK, the percentage of respondents that see an increase in small business loan delinquencies for the next six months jumped from 33% in the last survey to 61%. In Spain and Portugal, all respondents forecast an increase in delinquencies. The one bright spot was in Germany, Austria and Switzerland, where just 9% of respondents forecast an increase.
“The problems in credit repayments help explain banks’ conservative lending strategies,” said Mike Gordon, Fico vice president for Europe, Middle East and Africa (EMEA). “Bankers see these problems getting worse, given the risk of further recessions, and the credit challenges caused by unemployment. The small business picture is particularly worrying, because banks are under tremendous pressure to increase lending and stimulate economic growth, while the outlook for small business credit health is worse in nearly all European markets.”
The triple-threat toll of the economy, government austerity measures and banking regulation will continue to damage bank profitability, respondents said. Sixty-eight percent of respondents reported that government deficit reduction measures will reduce bank’s profitability. More than half of respondents said there will be an increase in bank consolidation this year. In addition, 55% of respondents said major banks will reduce their operations in central and eastern Europe (CEE), a trend that was just beginning to materialise in late 2011.
“Exposure in CEE creates a need for the banks to hold more capital and, as capital is scarce, the normal reaction will be reduce exposure,” said Gordon. “However, credit demand in this region is still growing, and it can be more profitable for lenders to keep lending here, if they can cover the capital needs.”
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