FICO, the leading provider of analytics and decision management technology, and Efma (European Financial Marketing Association) announced the results of the first European Credit Risk Survey. The survey, which asked credit risk management professionals to provide their outlook for the next six months, indicates that banking regulations may dampen credit supply and slow economic growth that is typically fueled by consumer and small business spending. In addition, risk managers forecast a rise in credit demand that outpaces the growth in supply in most regions, with the “credit gap” widest for small and medium enterprises (SMEs).
“While a variety of factors, including delinquency expectations and reserve requirements, may inhibit supply, credit risk managers are indicating cautious growth for the months to come,” said Mike Gordon, managing director in EMEA for FICO. “This survey reveals the tensions in an industry that is seeking growth but must move more cautiously, due to a potential tightening of banking regulations.”
Regulations seen as hampering credit supply
Risk managers foresaw a tightening in credit supply due to regulations, including Basel III requirements for higher capital reserves. One-third of respondents said Basel III would cause consumer lending to decrease, and more than half (52 percent) of respondents said consumer protection regulations would lead to a decrease in consumer lending.
In addition, 62 percent of respondents said new banking regulations will reduce profits from consumer and SME credit portfolios. “A long-term depression of banking profitability could undermine the stability of the banking sector and drive disinvestment from banking stocks,” said Gordon.
Gap between credit supply and demand
Respondents in most regions indicated that while the amount of credit provided is expected to rise, demand for credit is expected to rise faster, a trend that is more pronounced among small business borrowers. While 62 percent of respondents overall said that consumers will request more credit, only 47 percent believed the amount of credit extended will increase, and 17 percent believed it will decrease.
With respect to small business credit, 55 percent of respondents expected an increase in the total amount of credit requested by small businesses. However, only 35 percent of respondents saw an increase in the approval rate for small business credit, and only 39 percent saw the total amount of credit extended to rise.
“On the basis of these forecasts, consumers and business owners in many countries are likely to perceive a ‘credit gap’ for some time,” said Gordon. “We have seen a similar trend in the U.S. While moderate differences between the growth of credit demand and supply are to be expected, the economy’s growth in most of Europe depends on the ability of consumers and businesses to get credit. This means that weak credit availability could slow economic growth in Europe for the foreseeable future.”
In the UK, 38 percent of respondents said that applications for new credit will increase, and 46 percent foresaw growth in the amount of credit extended, indicating that supply will meet demand. The picture was different for small business credit: 58 percent of responders expected growth in credit demand by SMEs, and only 33 percent of responders expected growth in credit extended to SMEs.
By contrast, in the DACH market (Germany, Austria, Switzerland), nearly 80 percent of respondents expected a rise in the amount of credit extended, and 56 percent expected a rise in small business credit extended. “More bankers in DACH projected an increase in supply than increases in credit demand, suggesting that there may be a credit surplus unique to this region,” said Gordon. “Bankers in the German region were also unique in their reaction to regulatory demands, with 67 percent of respondents forecasting that regulations will cause an increase in available credit, rather than a decrease.”
Delinquencies forecast is mixed, overdrafts high
Across Europe, risk managers expect relative improvement in delinquencies on auto loans and credit cards, with significantly less optimism for mortgage and small business loan delinquency. However, respondents are relatively pessimistic about overdraftstied to current accounts. Less than 10 percent of respondents expected to see overdraft levels lessen, while nearly half (48 percent) expected delinquencies to worsen.
In the UK, respondents were slightly more pessimistic regarding both consumer and small business delinquency. More than 60 percent of respondents expected small business delinquency to worsen. Overdraft delinquency was expected to worsen by 43 percent of respondents. However, while 50 percent of respondents expected credit card delinquency to worsen, more than 35 percent of respondents project a reduction in card delinquencies.
“As the current account overdraft obligation signals a cash flow problem for the consumer, a problem in overdrafts could have knock-on delinquency impacts for payments made toward other credit obligations,” said Gordon.
“Efma and FICO are committed to advancing peer learning throughout the European financial services industry,” said Patrick Desmarès, Secretary General of Efma. “The findings from this survey will in turn help to inform the Risk Managers Advisory Council, and we will discuss results at the inaugural Efma Credit Risk and Debt Management Conference, which we will hold 17-18 February in Paris.”
A detailed report on the European Credit Risk Outlook, including specific results for the UK, the DACH region and the Iberian peninsula, is available at www.fico.com/en/FIResourcesLibrary/European_CreditRisk_Feb2011_2751RP.PDF. Participants represented more than 100 credit-granting institutions from 32 European countries.
FICO (NYSE:FICO), formerly known as Fair Isaac, transforms business by making every decision count. FICO’s Decision Management solutions combine trusted advice, world-class analytics and innovative applications to give organizations the power to automate, improve and connect decisions across their business. Clients in 80 countries work with FICO to increase customer loyalty and profitability, cut fraud losses, manage credit risk, meet regulatory and competitive demands, and rapidly build market share. FICO also helps millions of individuals manage their credit health through the www.myFICO.com website. Learn more about FICO at www.fico.com.
The European Financial Marketing Association has been a constant observer of the many changes within the retail financial services sector over the years. It has also demonstrated its ongoing commitment to providing information, help and advice by developing a forum for professionals throughout the sector. Efma is a non-profit making association, formed in 1971 by bankers and insurers to encourage their colleagues to share experiences; to promote the best practices of their institutions; and to collaborate through alliances and partnerships. Today, its members include over 80 per cent of Europe’s largest retail financial institutions. Through regular events, councils, detailed studies, its journal and its comprehensive website, the association provides retail financial service professionals with answers to their questions. These include the main issues that affect their business: multi-distribution strategies; customer relationships; product and service marketing; risk management; operational excellence and many other topics. Efma is above all a dynamic association, providing a great opportunity for discussion and the exchange of ideas without any commercial constraints. For the past 40 years, the loyalty of its members (representing over 3.000 brands) and their continuing financial support is the most powerful proof of its efficiency and effectiveness. Learn more at www.efma.com.