Bank lending across the eurozone is expected to rise 4.6% by the end of this year but will contract 1.8% in 2023 – the first decline since 2014 – as eurozone economies slip into recession, according to the latest EY European Bank Lending Economic Forecast.
Germany – traditionally the strongest of the major eurozone economies – and Italy are forecast to see the steepest declines in net bank lending next year, of 1.7% and 1.8% respectively, principally due to the economic consequences of their exposure to high energy prices.
As market demand for loans falls across the region, banks are also expected to tighten their lending criteria as they contend with rising interest rates and a volatile economic outlook.
The forecast fall in total bank lending in 2023 is driven principally by rising energy prices, interest rates and inflation and falling real household incomes affecting confidence and demand. The fall, however, is expected to be short-lived, providing the war in Ukraine does not escalate. A return to growth in bank lending of 2.7% is forecast in 2024 across the eurozone, followed by 3.7% in 2025, assuming inflation falls back, energy prices stabilise and confidence returns.
Omar Ali, EMEIA Financial Services Managing Partner at EY, comments: “While the European banking sector is on course for strong lending growth this year, 2023 is set to tell a very different story. The region’s economies are facing recession, and a contraction in borrowing driven by reduced demand and supply is forecast as consumers, businesses and banks become more cautious.
“The short-term economic impact will be felt universally, but small businesses are likely to struggle most if access to finance is constrained. Small businesses play a critical role in the economy and the lessons learned during the pandemic, when banks and policymakers across Europe worked together to support them, will be useful in this different, yet equally challenging period.”
Business lending to contract almost 3% in 2023 – the weakest in a decade
Eurozone bank lending to businesses is set for 4.8% growth this year. Excluding 2020, when the support offered to businesses in response to the pandemic distorted lending figures, this would be the fastest rise since 2008; although some of this loan demand is linked to the need for liquidity rather than investment and growth.
However, sluggish economic activity, higher borrowing costs, supply chain challenges and the rising cost of capital goods, mean that net lending to business is forecast to contract 2.7% in 2023, representing the weakest performance in a decade.
Better news is on the horizon, with business lending growth of 3.1% forecast in 2024, followed by 3.9% in 2025, as economic conditions look set to improve again.
Consumer credit demand to contract 1.4% in 2023 – the first decline since 2014
Unsecured lending is forecast to grow 1.2% this year across the eurozone. This increase is small by historic levels and is largely attributed to the increase in consumer spending following the removal of COVID-19 restrictions, as well as the impact of higher inflation and relatively low borrowing costs.
However, a slowing economy and a predicted fall in real incomes is likely to prompt a fall in demand for ‘big ticket’ items and associated funding. The EY European Bank Lending Economic Forecast predicts unsecured lending will contract 1.4% in 2023 before returning to growth in 2024 (2.2%), followed by a rise of 3% in 2025, as economic conditions look set to improve.
Mortgage lending to grow only 0.5% in 2023
Mortgage lending across the eurozone is set for strong growth of 4.9% in 2022, despite rising interest rates. However, both demand and supply side factors suggest lending growth will slow into next year as mortgage rates rise along with the cost of living, and lenders tighten criteria and effectively reduce mortgage availability. The EY European Bank Lending Forecast predicts just 0.5% mortgage growth in 2023 – the slowest since 2014 – before growth is expected to pick back up with 1.9% in 2024 and 2.5% in 2025.
Loan losses likely to rise, but remain below Global Financial Crisis levels
A weaker eurozone economy is likely to drive a rise in impairments across all forms of bank lending, but the EY European Bank Lending Forecast does not expect significant increases, and certainly not at levels recorded during and after the eurozone debt crisis. Loan losses across the eurozone are forecast to rise 2.6% this year, from 2.2% in 2021, and slowly rise over the subsequent years – as is common within the economic cycle following a downturn – to 3.3% in 2023, 4.2% in 2024 and 5% in 2025. For context, loan losses peaked at 8.4% in 2013.
Tighter, post-Global Financial Crisis regulation and lending criteria should mean mortgage borrowers are better able to deal with higher rates, while the savings built up by households during the pandemic are likely to provide a cushion of support against falling incomes and rising job losses. On the corporate side, national government-backed loan schemes offered during the pandemic, which tended to offer generous repayment terms, should limit a rise in the share of non-performing business loans, at least in the short term.
Nigel Moden, EMEIA Banking and Capital Markets Leader at EY, comments: “Europe’s banks are playing a significant role in keeping capital flowing and ensuring access to crucial lines of finance at a challenging economic time. With high capital buffers and resilience built up over 15 years, the region’s major financial institutions are well placed to continue supporting customers and have shown impressive fortitude despite the ongoing market challenges they face. The recessions predicted this winter in many European markets will of course come as a challenge, but the expectation is that they will be relatively shallow and borrowing should rise steadily from 2024. As this more positive outlook suggests, the banking sector can return its focus to growth, innovation and improved sustainability.”