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December 1, 2016
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Presentation: European banks - Non-performing loans, negative rates & regulation Research Deutsche Bank Jan Schildbach 1 December 2016 Research Deutsche Bank European banks: Non-performing loans, negative rates & regulation Nicosia, 1 December 2016 Jan Schildbach Research Deutsche Bank Jan Schildbach 1 December 2016 Agenda 2 1 Regulation Non-performing loans & negative rates 2 Research Deutsche Bank Jan Schildbach 1 December 2016 High – and often rising – private-sector debt levels in Europe 3 0 20 40 60 80 100 FRDEUKUSEuro area ITESPTGRIESE 20052015 Credit to households % of GDP Source: BIS 267 0 40 80 120 160 200 FRDEUKUSEuro area ITESPTGRIESE 20052015 Credit to non-financial corporations % of GDP Source: BIS Research Deutsche Bank Jan Schildbach 1 December 2016 4 Strong policy response as a result of deep crises: Record-low interest rates 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 111213141516 Loans to non-financial corporations, EUR ≤ 1 m Loans to non-financial corporations, EUR > 1 m Loans to self-employed & non-corporate businesses Corporate lending rates in the euro area, by loan size %, new business Source: ECB 3 4 5 6 7 8 9 1.5 2.0 2.5 3.0 3.5 4.0 4.5 111213141516 Mortgages (left) Loans to self-employed & non-corporate businesses (left) Consumer credit (right) %, new business Source: ECB Retail lending rates in the euro area Research Deutsche Bank Jan Schildbach 1 December 2016 Low rates have prevented a surge in delinquencies – and thus relieved banks 5 32.9 32.1 30.1 28.7 26.1 24.0 23.2 53.5 51.1 49.5 59.6 61.0 60.5 61.4 25.2 21.6 22.2 21.3 18.9 17.7 16.0 19.5 22.0 24.9 30.0 33.1 31.2 29.5 18.1 17.7 17.4 19.0 21.1 18.2 15.9 12.3 12.9 12.9 13.1 12.1 11.5 11.5 21.9 21.3 20.0 20.0 20.4 19.0 17.5 0 20 40 60 80 100 120 140 160 180 200 09101112131415 GermanyFrance UKGIIPS BeneluxAustria/Switzerland Nordics Corporate insolvencies in Europe in '000 Source: Creditreform -20 -15 -10 -5 0 5 10 15 20111213141516 Sources: Company reports, Deutsche Bank Research 9M loan loss provisions of the large European banks % yoy Research Deutsche Bank Jan Schildbach 1 December 2016 6 ... as credit quality has stabilised/improved 0 8 16 24 32 40 48 56 0 4 8 12 16 20 24 28 Q4 09Q4 10Q4 11Q4 12Q4 13Q4 14Q4 15 France*Germany* UKUS Italy*Spain PortugalIreland Greece (right) Cyprus (right) Non-performing loans as % of total loans NPLs in selected countries * No data available for Q1 and Q3, data for Germany only available for Q4. Sources: IMF, Banco de España, Banco de Portugal, Deutsche Bank Research 0 50 100 150 200 250 300 350 400 Q4 10Q4 11Q4 12Q4 13Q4 14Q4 15 FranceGermanyUKUS ItalySpainPortugalGreece Ireland Cyprus Total NPLs Sources: IMF, Banco de España, Deutsche Bank Research in billions of national currency Research Deutsche Bank Jan Schildbach 1 December 2016 But low rates have failed to support or even hurt European banks in other areas 7 105 110 115 120 125 130 135 140 H1 09 H2H1 10 H2H1 11 H2H1 12 H2H1 13 H2H1 14 H2H1 15 H2H1 16 EUR bn, top 20 European banks Sources: Company reports, Deutsche Bank Research Shrinking interest margins: Down- ward trend in net interest income 0 2 4 6 8 10 12 990103050709111315 Millionen DepositsLoans EUR tr Sources: ECB, Deutsche Bank Research Anaemic lending: Euro-area banks' business with the private sector Research Deutsche Bank Jan Schildbach 1 December 2016 ... while banks are facing additional structural challenges. Challenge 1: New competitors 8 0 5 10 15 20 25 101112131415 USD bn Global FinTech investment Sources: CB Insights, Deutsche Bank Research 03691215 US China India UK Germany Ireland Investment in FinTechs by country USD bn, 2015 Sources: Accenture, Innovate Finance, Deutsche Bank Research Research Deutsche Bank Jan Schildbach 1 December 2016 Challenge 2: Large investment needs, low efficiency 9 0 10 20 30 40 50 60 70 80 90 DEFRUKITNLCYEMU 20072015 Share of online banking users % of total population Sources: Eurostat, Deutsche Bank Research 30 40 50 60 70 80 90 06070809101112131415 GermanyFranceUK ItalySpainSweden Cyprus % Sources: ECB, Deutsche Bank Research Cost-income ratio of European banks Research Deutsche Bank Jan Schildbach 1 December 2016 Agenda 2 1 Regulation Non-performing loans & negative rates 10 Research Deutsche Bank Jan Schildbach 1 December 2016 Challenge 3: Regulation Building up capital has been painful 11 4 5 6 7 8 9 10 11 12 13 14 08 Q2 09 09 Q2 10 10 Q2 11 11 Q2 12 12 Q2 13 13 Q2 14 14 Q2 15 15 Q2 16 Fully loadedCurrent/transitional rules Core Tier 1/Common Equity Tier 1 ratio* of Europe's 20 largest banks % Sources: Company reports, Deutsche Bank Research * Basel II; Basel 2.5 applied from Q4 11 on, Basel III from Q1 14 on 10 11 12 13 14 15 16 17 18 19 20 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09 Dec 09 Jun 10 Dec 10 Jun 11 Dec 11 Jun 12 Dec 12 Jun 13 Dec 13 Jun 14 Dec 14 Jun 15 Dec 15 Jun 16 Total assets / equity capital Euro-area banks' leverage ratio Sources: ECB, Deutsche Bank Research Research Deutsche Bank Jan Schildbach 1 December 2016 ... because European banks’ earnings are lagging far behind those of US peers 12 70 80 90 100 110 120 130 Q1 06 Q1 07 Q1 08 Q1 09 Q1 10 Q1 11 Q1 12 Q1 13 Q1 14 Q1 15 Q1 16 US banksLarge European banks Total revenues Sources: FDIC, company reports, Deutsche Bank Research Q1 2006 = 100, up to Q2 16 -80 -60 -40 -20 0 20 40 60 Q1 06 Q1 07 Q1 08 Q1 09 Q1 10 Q1 11 Q1 12 Q1 13 Q1 14 Q1 15 Q1 16 US banksLarge European banks Net income Sources: FDIC, ECB, company reports, Deutsche Bank Research USD / EUR bn, up to Q2 16 Research Deutsche Bank Jan Schildbach 1 December 2016 Complexity due to new consultations and revisions by the BCBS: − some elements of Basel III will become mandatory over the next few years − Scope of “Basel IV” not fully defined yet Upcoming regulatory initiatives: − Revisions to the standardised approach for credit risk • move away from internal models, partly eliminating them for low-default portfolios • new capital floor based on the revised approach to mitigate model risks − Fundamental Review of the Trading Book •revised standardised approach to be given greater weight / potential floor •gap between standard and internal approaches to be reduced − Potential increase in Leverage Ratio requirements for G-SIBs − Introduction of TLAC as an additional minimum capital requirement  addressing the too-big-too-fail problem − Interest rate risk in the banking book (IRRBB) • no immediate prudential capital requirements, but supervisory discretion With even more & tighter regulation to come – “Basel IV” is looming 13 Research Deutsche Bank Jan Schildbach 1 December 2016 It is not only capital: Overall regulatory timeline 14 Source: Deutsche Bank *Conformance date for legacy funds: July 2016 Research Deutsche Bank Jan Schildbach 1 December 2016 Contact Jan Schildbach Deutsche Bank Research Head of Banking, Financial Markets and Regulation Taunusanlage 12 D-60325 Frankfurt/Main Phone: +49 69 910-31717 E-mail: jan.schildbach@db.com Internet: www.dbresearch.com Research Deutsche Bank Jan Schildbach 1 December 2016 © Copyright 2016. 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