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European Credit Still on the Rocks



Mike Gordon

Survey of bank risk managers indicates credit for consumers and small businesses remains in short supply

By Mike Gordon, vice president and general manager for Europe,the Middle East and Africa at FICO.

Despite recent government efforts to stimulate economic recovery and growth, Europe’s banking industry is far from being out of the woods just yet. Indeed, credit risk managers at banks throughout the region foresee not only the continuation of existing challenges, but the rise of new ones as well.

These concerns are brought to the fore in the fifth European Credit Risk Outlook from FICO, a leading provider of predictive analytics and decision management technology, and the European organisation Efma. Respondents indicate that in addition to ongoing misalignment between credit supply and demand, and delinquencies continuing to rise in some areas, they also expect to see the financial sector job market suffer while evolving consumer behaviour patterns bring an increased risk of fraud.

The results of this latest survey of European credit risk managers, carried out in May and June, reflect ongoing pessimism about an imminent recovery for the financial sector. Our key findings include:

  • Seventy one percent of respondents expect staffing cuts to increase in the banking sector, with nearly half of all respondents anticipating a strong increase
  • Ninety percent of participants expect a rise in bank consolidation in the strongest economies in Europe, and 72 percent in the weaker economies
  • Banks may lose customers to alternative sources of credit, according to 88 percent of respondents
  • The widest credit gap since our survey began has emerged, with 84 percent of risk managers believing that they will not make additional credit available and 37 percent expecting demand for credit from SMBs to increase
  • While overall delinquency levels are expected to rise less steeply than previously, 55 percent of respondents think mortgage delinquencies in particular are still increasing
  • Fifty eight percent of risk managers expect mobile banking to increase significantly. This is likely to drive an increase in card-not-present fraud as well, which over 80 percent of respondents expect

Highlighted more strongly than in previous surveys, the increases in job cuts and consolidation can be attributed to the growing pressure on banks to make funds available to cope with spending on obligatory regulatory compliance. We may see some European banks with positions in other regions (such as Latin America) begin to reduce their operations in these areas to concentrate on strengthening their position in their core markets.Mike Gordon

Meanwhile, it seems that the discrepancy between credit supply and demand that has been noted in previous surveys remains significant. Indeed, as banks weigh their capital against regulatory demands and profitability considerations, credit availability is likely to stay tightly contained (in the UK we actually saw a reduction in lending in June). At the same time, 37 percent of risk managers think the amount of credit requested by small businesses will rise, creating a larger credit gap than has been seen to date. Although the outlook seems a bit brighter for consumers, it’s likely that we’ll see both groups of borrowers turning more to alternative forms of credit, such as micro-lending. While this can be an effective solution for strapped-for-cash individuals in the short term, it may be storing up future complications for banks, which will need to have a compelling offering to attract these customers again when things get back on track.

The forecast for credit delinquencies seems slightly more optimistic. Mirroring the findings of our recent survey of US risk managers, the rise in delinquencies in Europe is also expected to slow down. As much of the region battles its way through a double-dip recession, this could reflect the fact that consumers are doing all they can to protect their credit cards and overdrafts, which for many have become essential survival tools. To ensure profitability in these tightened circumstances, banks should use their collections and recovery activities – such as pre-collections communications or credit counseling – to support customers in their efforts to avoid delinquency.

When we turn our attention to mortgages though, we see a different story. Fifty five percent of respondents to the survey forecast a rise in delinquencies here, slightly more than the last survey’s 53 percent. In the UK, risk managers’ attitude to delinquencies on auto loans has become markedly more pessimistic this time, with 60 percent expecting delinquencies to go up compared with 75 percent thinking it would stay flat in the last survey.

So where will things go from here? While no one can predict the outcome of the Eurozone crisis, it’s safe to say these difficulties will be with us for a while. As regulators continue to crack down on the financial industry to protect itself for the future, one priority that we believe will be common across the board is that of shoring up capital in line with regulations. To do this, banks everywhere must focus on two things: strengthening their capital management position and building the sophistication of their risk management capabilities.

It’s not enough just to be compliant though, and lenders are still looking to remain competitive. The key here, now more than ever, is knowing your customer. With a greater understanding of customer trends, lenders can achieve a responsible equilibrium of credit supply and demand while earning back consumer confidence.

As customer behaviour evolves and growth remains sluggish, successful lenders will be those who innovate to link top-level strategy around capital and risk management to customer-level decisions. Few banks are doing this yet, but those that are can combine deeper customer insight with visibility of the impact of macroeconomic factors on their operational decisions. The result? Stronger capital levels, more effective risk management and smarter customer decisions, helping turn compliance responsibility into competitive advantage, even in today’s challenging environment.
For a copy of the latest European Credit Risk Outlook, visit

Source: European Credit Risk Outlook, July 2012. Copyright 2012 Fair Isaac Corporation.

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