That shrinking feeling tracing the changing shape of the EU banking industry

That Shrinking Feeling Tracing the changing shape of the EU banking industry Six years after the onset of the global financial crisis, EU banks are still busy shoring up their balance sh

Banks are slimming down

210

190

170

150

130

110

90

2009=100%

The decline has been led by the shrinking of net loans and trading books.

That Shrinking Feeling

Tracing the changing shape of the EU banking industry

Six years after the onset of the global financial crisis, EU banks are

still busy shoring up their balance sheets to meet regulatory

demands But to what extent have the Basel III rules — announced

in 2010 — already changed the way EU banks do business?

In 2013, mean total assets

at the largest EU banks have fallen by

EU banks are less bloated with assets than they were previously.

2010 2009

2010 2009

• Cash and cash equivalents

• Net loans

• Trading account assets

• Investment securities available for sale

• Interest bearing deposits at banks

Breakdown of assets at EU banks, 2009-2013

For more information, please visit www.pwc.com/riskminds

An infographic from The Economist Intelligence Unit

EUR mn Trading book/market risk, 2011-2013

30000

25000

20000

15000

10000

5000

0

Banks have reduced their risk exposures

In tandem with decreasing their assets, since 2011 banks significantly cut their exposure to

adverse market movements

Most striking is the

reduction in riskier

corporate lending and

the corresponding

rise in government

bonds, most of which

are safer and more

liquid sovereign bonds.

The value of mean risk-weighted assets

in Europe has been trending downwards.

150

140

130

120

110

100

90

2009=100% Mean risk-weighted assets

Canada & Australia

US Japan

EU

2010 2009

160,000

150,000

140,000

9,000

8,000

EU banking industry’s mean credit risk in risk-weighted assets, 2011-2013

Corporate lending

Corporate lending Government bonds

Government bonds

Banks have improved their liquidity position

EU banks not only have smaller, less risky balance sheets resting on firmer capital foundations, they are also in a much stronger position to meet a liquidity crunch

EU banks increased their holdings of cash and cash-equivalent assets by no less than

EU banks reduced

their short-term

borrowings by

EU banks lowered the ratio of liquid assets

to non-liquid assets

7

3

2011 2012 2013 2010

A springboard for change?

This combination of reduced leverage, increased capital quality and a stronger liquidity position has led to a fitter and leaner banking industry

2009=100% Value of EU bank loans, 2009-2013

At the same time business models are changing, with banks turning away from more volatile

activities The past few years have seen some lenders move more towards a deposits-driven

business Similarly, commercial loans – many of which are believed to be unsecured – are

shrinking faster than consumer loans.

Having passed their preliminary health

check, EU banks are now in a stronger,

more stable position, which will have

more appeal to shareholders The journey

to full health, though, is just beginning.

Tier 1 Capital ratio Capital ratios (mean),2009 to 2013

Capital ratio

14

12

10

8

6

4

2 10.7 8.4 11.6 9.2 11.8 10 13 11.3 13.4 12

%

Total deposits Net loans

500 400 300 200 100

443.334 367.771 462.823 403.073 462.448 411.677 454.238 421.057 425.862 421.110

EUR bn

Mean net loans and mean total deposits,

2009 to 2013

EU banks have already been given the all clear by regulators with average Tier 1 Capital ratios

well above Basel III requirements of 4.5% for Common Equity Tier 1 and 6% for Tier 1.

120

110

100

90

80

70

2011 2012 2013 2010

2009

Consumer loans Net loans

Commercial loans