European Banking Market - November 2005

TABLE OF CONTENTS

• Introduction and Abbreviations
• Aims of the report
• Abbreviations and definitions
• Executive Summary
• EU15 bank balance sheets top €30,000 billion
• The European banking environment is changing fundamentally
• A sharp division remains between East and West
• Consolidation has seen shrinking bank numbers
• Lending increasingly outstrips saving
• France is Europe's third banking power
• German banking sector struggles with structures of the past
• Italy is Europe's banking problem child
• Spain is Europe's most densely banked country
• UK banks enjoy a 'golden era' of profitability
• Market Background
• European single market for financial services takes shape
• Consumer Credit Directive
• Deposit Guarantee Schemes Directive
• Directive on taxation of saving income
• Distance Marketing of Consumer Financial Services Directive
• E-Money Directive
• International Accounting Standards (IAS)
• Markets in Financial Instruments Directive
• Retail payments
• Bringing in Basel II
• Bankers must accommodate greater regulatory oversight
• The euro unites wholesale financial markets, but retail markets remain fragmented
• Economic transition of Central and Eastern European countries created a banking fire sale
  • Figure 1: Rate of growth of banking assets in the Central and Eastern Europe, 2002-05
  • Figure 2: Populations of EU Member States, candidate and applicant countries, 2004
• Different attitudes towards public ownership limit scope for pan-European retail banking market
• Consumption and confidence are growing, but remain unspectacular
  • Figure 3: Key economic data, EU25 (real annual percentage change), 2001-06
  • Figure 4: Forecast unemployment rate, EU25, 2005
  • Figure 5: Consumer confidence in the EU25, April 2004-October 2005
  • Figure 6: Average wages in the EU compared to GDP per capita, 2003
• As Europe goes grey, focus shifts from creating wealth to managing assets
  • Figure 7: The switch to managing assets in the UK, change in structure of mortgage lending, 1997-2004
  • Figure 8: EU25 forecast population aged 65+, 2004 and 2025
  • Figure 9: EU25 live births per 1,000 population, 1980 and 2002
• Changing consumer demand forces banks to modify their offering
• Offshoring is happening but with mixed impacts
• Online banking enjoys success as a delivery channel
  • Figure 10: Use of online banking and attitudes towards personal contact with bank advisors, selected countries, 2005
• European Overview
• Banking assets in EU15 worth 303% of GDP
  • Figure 11: Assets of MFIs in EU15 countries and assets as percentage of GDP, 2005
  • Figure 12: EU15 banking sectors: Share of total banking assets and share of GDP, 2004
• Banking consolidation has varying impacts across Europe
  • Figure 13: Number of credit institutions, by country, EU25, 1999-2005
• Cross-border merger activity speeds up after a slow start
• Germany, France and Austria have largest numbers of credit institutions
  • Figure 14: Main shares of the total number of EU25 credit institutions, 2005
• Growth in banking assets more marked outside than inside the eurozone
  • Figure 15: Growth of banking assets, eurozone and non-eurozone countries, 2002-05
• Germany and France hold largest share of eurozone MFI deposits
  • Figure 16: Eurozone banking liabilities: deposits of eurozone MFIs, January 1999-August 2005 (€bn)
• Ireland has been the biggest winner in attracting eurozone MFI deposits
  • Figure 17: Percentage increase in eurozone MFI deposits, by eurozone country, 1999-2005 and 2001-05
• France and Germany also dominant in terms of eurozone non-MFI deposits
  • Figure 18: Eurozone banking liabilities: eurozone non-MFI deposits, January 1999-July 2005 (€bn)
• Household and corporate deposits have risen quickly in Spain and Ireland
  • Figure 19: Percentage increase in eurozone non-MFI deposits*, by eurozone country, 1999-2005 and 2001-05
• Eurozone lending grows faster than deposits
  • Figure 20: Eurozone banking assets: lending to eurozone non-MFIs, January 1999-July 2005 (€bn)
  • Figure 21: Percentage increase in lending to eurozone non-MFIs*, by eurozone country, 1999-2005 and 2001-05
• Savings high and borrowing low in Belgium
  • Figure 22: Ratio of non-MFI loans to deposits, eurozone countries, August 2005 (%)
• Deposits of households and businesses worth 25% of eurozone banking balance sheet total
  • Figure 23: Deposits of eurozone households and businesses with eurozone MFIs, by notice period, €bn, 2003-05
• Consumer lending up driven by house price inflation
  • Figure 24: Consumer lending in the eurozone, by type (€bn), 2003-05
• Interest rates in eurozone remain steady and low
  • Figure 25: Average interest rates in the eurozone, August 2004-August 2005
• Lending in Denmark rises as economic growth speeds up
  • Figure 26: Danish MFIs consolidated balance sheet, August 2005
• Swedish banking market is one of Europe's most concentrated
  • Figure 27: Swedish MFIs consolidated balance sheet, August 2005
• Poland has largest banking sector amongst new EU Member States
  • Figure 28: Banking assets of the ten new EU Member States (€bn), 2005
• Hungary's OTP is largest domestically owned bank in new EU Member States
  • Figure 29: Largest domestically owned banks in the new EU Member States, 2004
• Usage of cashless payment systems highest in Finland
  • Figure 30: Volume of cashless payments in EU25, 2003
• Finns and Irish most frequent ATM users
  • Figure 31: ATMs and their usage in the EU25 countries, 2003
• HSBC was Europe's largest bank in 2004
  • Figure 32: Top 50 European banks, by market capitalisation ($mn), 2004
• France
• Economy
  • Figure 33: France GDP and rate of change, 1995-2010 (2000 prices)
• Dented consumer confidence
  • Figure 34: France consumer expenditure and rate of change, 1995-2010 (2000 prices)
• Population
• Passing 61 million
  • Figure 35: French population and rate of change, 1995-2010
• Retiring group expands
• Family groups to fall
  • Figure 36: France, population aged under 15 compared with population aged 65+, 1995-2010
• Banking sector
• French banking dominated by six big organisations
  • Figure 37: Number of banks in France at year-end, 2000-04
• Despite consolidation, branch numbers increase
  • Figure 38: French bank branch networks, 2000-04
• French banking sector has third-largest assets in the EU
  • Figure 39: French banking assets, by type of asset, €mn, January 1999-July 2005
• Households and businesses contribute 22.6% of French banking liabilities
  • Figure 40: French banking liabilities, by type of liability, €mn, January 1999-July 2005
• French households have increased their current account deposits by just over half
  • Figure 41: Sight deposits of French residents, €mn, January 1999-July 2005
• French households reluctant to increase their long-term deposits
  • Figure 42: Time deposits of French residents, two years or less, €mn, January 1999-July 2005
  • Figure 43: Time deposits of French residents, over two years, €mn, January 1999-July 2005
• Most bank accounts reside with mutual/co-operative banks
  • Figure 44: Bank accounts in France, thousands, 2000-04
• French households borrowing more
  • Figure 45: French bank lending to resident sectors, €mn, January 1999-July 2005
• Ratio of lending to deposits has climbed steadily
  • Figure 46: Ratio of French MFI lending to deposits of resident households and businesses, January 1999-May 2005
  • Figure 47: Ratio of French MFI lending to deposits of resident households, January 1999-May 2005
• Mortgage lending has nearly doubled in France in six years
  • Figure 48: French bank lending to households, by type of lending, €mn, January 1999-July 2005
• France's largest bank ranks second in Europe
  • Figure 49: Largest French banking groups and share of French balance sheet total, 2003 and 2004
• Germany
• Economy
  • Figure 50: Germany GDP and rate of change, 1995-2010 (1995 prices)
• Oil price worries
  • Figure 51: Germany personal disposable income and rate of change, 1995-2010 (1995 prices)
• Political vacuum resolved -- but final outcome unclear
• Population
• Natural trend for population decline
• Immigration key to trends
  • Figure 52: Germany population and rate of change, 1995-2010
• Where have all the children gone?
  • Figure 53: Germany, population aged under 15 compared with population aged 65+, thousands, 1995-2010
• Empty nesters advance
• Increase in widowers
  • Figure 54: Germany, population aged 65+, by gender, thousands, 1995-2010
• Banking sector
• Consolidation -- but Germany remains overbanked
  • Figure 55: Number of commercial banks, savings banks and Landesbanken in Germany, 1990-2004
  • Figure 56: Change in number of banks in Germany, by type of bank, 1995 and 2004
• Branch networks have shrunk, especially amongst commercial banks
  • Figure 57: Domestic bank offices in Germany, by type of bank, 1999-2004
• Balance sheet growth relatively slow
  • Figure 58: Assets of German banks, €bn, January 2000-July 2005
• Little change in spread of liabilities
  • Figure 59: Liabilities of German banks, €bn, January 2000-July 2005
• Business share of deposits has increased
  • Figure 60: Non-bank deposits in German banks, €bn, January 2000-July 2005
• Germans stay loyal to the Sparkassen
  • Figure 61: Deposits of German households, by type of bank, €bn, January 2000-July 2005
• Foreign banks also make inroads into business banking marketplace
  • Figure 62: Deposits of German businesses, by type of bank, €bn, January 2000-May 2005
• Clear move evident away from traditional savings deposits
  • Figure 63: Deposits of German households, by type of deposit, €bn, January 2000-July 2005
• Flat lending reflects economic caution
  • Figure 64: Lending by German banks, by category of borrower, €bn, January 2000-January 2005
• German households prefer to stay out of debt
  • Figure 65: Ratio (%) of household lending to household deposits in Germany, January 2000-April 2005
• Residential real estate market has shown growth
  • Figure 66: Mortgage loans to German businesses and households, €bn, January 1999-January 2005
• Technological change drives take-up of payment cards
  • Figure 67: Total bank payment cards issued by German banks in circulation, and payment cards issued by the Sparkassen, thousands, 1999-2005
• Market fragmented but top ten banks control two thirds of German banking assets
  • Figure 68: Top 30 German banks, by assets (€billion), 2004
• Italy
• Economy
  • Figure 69: Italy GDP and rate of change, €bn, 1995-2010 (constant 1995 prices)
• Political, as well as economic, stalemate
• Consumer market sluggish in short term
  • Figure 70: Italy consumer expenditure and rate of change, €bn, 1995-2010 (constant 1995 prices)
• Population
• Return to slowing growth
  • Figure 71: Italy population and rate of change, thousands, 1995-2010
• Births to slow again
• Scarcity of home builders
  • Figure 72: Italy population under 15 compared to population aged 65+, thousands, 1995-2010
• Ageing not altogether straightforward
  • Figure 73: Percentage change in population in Italy, by age, 2000-05 and 2005-10
• More elderly couples
• Banking sector
• Scope for consolidation amongst Italy's commercial banks
  • Figure 74: Number of banks in Italy, by type of institution, 1999-2005
• Branch numbers have increased by nearly a fifth
  • Figure 75: Number of bank branches in Italy, by type of institution, 1999-2005
• Italian banks' balance sheet total small in comparison to other main EU economies
  • Figure 76: Assets of Italian banks, by type of asset, €mn, January 2000-July 2005
• Deposits of businesses and households have increased more slowly than balance sheet average
  • Figure 77: Liabilities of Italian banks, by type of liability, €mn, January 2000-July 2005
• Consumer household deposits make up 65% of Italian resident deposits
  • Figure 78: Deposits of Italian resident sectors, €mn, Q1 1999-Q1 2005
• Major and large banks manage 55% of resident deposits
  • Figure 79: Deposits of Italian residents, by size of bank, €mn, Q1 1999-Q1 2005
  • Figure 80: Deposits of Italian residents, by bank location, €mn, Q1 1999-Q1 2005
• Time deposits lose popularity
  • Figure 81: Deposits of Italian residents, by technical form, €mn, Q1 1999-Q1 2005
• Deposits up but lending up more
  • Figure 82: Italian bank lending to Italian resident sectors, €mn, Q1 1999-Q1 2005
• Lending now worth twice as much as deposits
  • Figure 83: Ratio of Italian bank lending to Italian resident sectors to deposits of Italian resident sectors, Q1 1999-Q1 2005
• However, households are not indebted
  • Figure 84: Ratio of Italian bank lending to Italian households to deposits of Italian households, Q1 1999-Q1 2005
  • Figure 85: Italian bank lending for mortgages and personal loans, €mn, Q1 1999-Q1 2005
• Italians become more willing to flash the plastic
  • Figure 86: Italian spending and usage of credit/debit cards, 1999-2004
• Strenuous efforts have been made to reduce bad debt
  • Figure 87: Italian banks, bad assets as percentage of assets, Q1 1999-Q1 2005
• Banca Intesa has 12% share of Italian balance sheet total
  • Figure 88: Top ten Italian banks, by assets, 2003 and 2004 (€mn)
• Spain
• Economy
• Strong consumer economy
• Micro and family businesses central to economic growth
  • Figure 89: Spain GDP and rate of change, €bn, 1995-2010 (constant 1995 prices)
• Medium-term constraints...
• ...but remaining robust
  • Figure 90: Spain consumer expenditure and rate of change, €bn, 1995-2010 (constant 1995 prices)
• Population
• Matching economic growth
  • Figure 91: Spain population and rate of change, thousands, 1995-2010
• Birth-rate recovery
• Growth at both ends of the population spectrum
  • Figure 92: Spain population under 15 compared to population aged 65+, thousands, 1995-2010
• Banking sector
• Consolidation -- but less than in other countries
  • Figure 93: Spanish credit institutions, by type, Q4 2000-Q2 2005
• A dense banking landscape
  • Figure 94: Branches of Spanish banks, by type of institution, 1999-2005
• Balance sheet total approaches €1,850 billion
  • Figure 95: Assets of Spanish banks, by type of institution, €bn, January 2000-May 2005
• Lending to resident sectors accounts for 55% of Spanish balance sheet total
  • Figure 96: Assets of Spanish banks, by type of asset, €bn, January 2000-May 2005
• Deposits increasing more slowly than borrowing
  • Figure 97: Liabilities of Spanish banks, by type of liability, €bn, January 2000-May 2005
• Depositors stay loyal to the cajas
  • Figure 98: Deposits of Spanish resident sectors (excluding government), by type of institution, €bn, January 2000-May 2005
• Lending to households worth €463 billion
  • Figure 99: Spanish banks lending to resident sectors, €mn, Q1 2000-Q1 2005
• Spanish residents now borrow 50% more than they save
  • Figure 100: Spanish bank lending to resident sectors, ratio of lending to deposits, Q1 2000-Q1 2005
• Spain's property boom underpins household lending growth
  • Figure 101: Spanish bank lending, mortgages and loans, €mn, Q1 2000-Q1 2005
• Bad debt under control
  • Figure 102: Spanish bank write-offs as a percentage of assets, Q1 2000-Q1 2005
• Grupo Santander dominates the market
  • Figure 103: Top 20 Spanish banks, by assets, 2003 and 2004
• Growing economy boosts Spanish banking profits
  • Figure 104: Spanish banking sector profits, by type of institution, €mn, 1999-2004
• UK
• Economy
  • Figure 105: UK GDP and rate of change, 1993-2010 (2000 prices)
• Oil price rises fuel inflationary fears
• Political stability, notwithstanding a few wobbles
  • Figure 106: UK unemployment, number and rate, 1993-2010
• Population
• UK trend is for marginal population growth
  • Figure 107: UK population aged 16+, 1993-2010
• Immigration key to future population trends
• Pros and cons of an ageing population
• Ageing of the population compounded by falling birth-rates
  • Figure 108: UK population aged under 15 compared with population aged 65+, 1993-2010
  • Figure 109: GB households, one-person households and owned dwellings (millions), 1993-2010
• Banking sector
• Ongoing consolidation sees bank numbers fall
  • Figure 110: Number of banks authorised to take deposits in the UK, 2000-05
• Branch networks have also shrunk
  • Figure 111: Number of bank branches in the UK, 1999-2004
• UK banking balance sheet gets healthier by the year
  • Figure 112: Composition of assets of UK banks (£mn), 1999-2004
  • Figure 113: Composition of liabilities of UK banks (£mn), 1999-2004
• Deposits from individuals make up 60% of total Sterling deposits
  • Figure 114: Sterling deposits held by UK banks (£mn), 1999-2004
• Average individual bank account contains £3,882
  • Figure 115: Average Sterling deposit in individual account (MBBG), 1999-2004
  • Figure 116: Number of bank accounts, (MBBG, thousands), 1999-2004
• Non-interest-bearing accounts fall out of fashion whilst basic banking extends its reach
  • Figure 117: Number of individual bank accounts (MBBG, thousands) and basic accounts, 1999-2004
• Lending hits record levels
  • Figure 118: Sterling advances by MBBGs to UK residents, £mn, 1999-2004
  • Figure 119: Ratio of loans to deposits, UK residents, all currencies, 1999-2004
• Rise in mortgage lending reflects property price boom
  • Figure 120: Breakdown of lending to individuals by MBBGs (£mn), January 2003-July 2005
• Some evidence of slower consumer credit growth
  • Figure 121: Number of debit and credit cards in issue in the UK, 1999-2004
• Significant increase in write-offs in the last three years
  • Figure 122: Sterling write-offs and other revaluations (MBBGs, £mn), 1999-2004
• British banks enjoy a 'golden era'
  • Figure 123: Major British Banking Groups, balance sheet totals, £mn, 2003 and 2004
  • Figure 124: Major British Banking Groups, pre-tax profits, £mn, 2003 and 2004
• Future and Conclusions
• More European integration means more changes ahead
• The EU focus is switching from new legislation to enforcing existing rules, however
• European wholesale markets and national retail markets
• Addressing the public/private balance
• The demographic challenge is fundamental
• Borrowing is on the rise across Europe, and will continue to grow -- for now
• Main centres of future growth can be drawn out
• Forecast
• At different points in the cycle
• More favourable conditions for the corporate sector
• Spain and the UK have different problems
• Swinging back to commercial
  • Figure 125: Total assets of largest countries' banks, current terms, 2005-10
• Still flowing in
• France -- the average performer
  • Figure 126: Net increases in French banks' assets, 2005-10
• Germany -- a slowly awakening giant
  • Figure 127: Net increases in German banks' assets, 2005-10
• Italy -- only a small improvement on past performance
  • Figure 128: Net increases in Italian banks' assets, 2005-10
• Spain -- slowing but still a star performer
  • Figure 129: Net increases in Spanish banks' assets, 2005-10
• UK -- slowing but still healthy
  • Figure 130: Net increases in British banks' assets, 2005-10
• Methodology