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June 16, 2016
Presentation: Non-performing loans in Europe and the US – impact on banks & customers Research Deutsche Bank Jan Schildbach 16 June 2016 Research Deutsche Bank Non-performing loans in Europe and the US – impact on banks & customers Brussels, 16 June 2016 Jan Schildbach Research Deutsche Bank Jan Schildbach 16 June 2016 Agenda 2 1 NPL impact on banks & customers Macro picture 2 Research Deutsche Bank Jan Schildbach 16 June 2016 High – and often rising – private-sector debt levels in Europe 3 0 20 40 60 80 100 FRDEUKUSEuro area ITESPTGRIESE 2005Q3 2015 Credit to households % of GDP Source: BIS 0 40 80 120 160 200 FRDEUKUSEuro area ITESPTGRIESE 2005Q3 2015 Credit to non-financial corporations % of GDP Source: BIS Research Deutsche Bank Jan Schildbach 16 June 2016 ... partly a result of deep crisis (not yet overcome by some countries) – leading to strong policy response 4 75 80 85 90 95 100 105 110 115 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 EU-28EMU-19DEFR UKITESGR PTSEUS 2010 = 100 Source: Eurostat Real GDP 0 1 2 3 4 5 6 7 19990103050709111315 USEurolandUK % Main official interest rates Sources: Federal Reserve, ECB, BoE Research Deutsche Bank Jan Schildbach 16 June 2016 5 Bank lending rates: Record lows abound 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 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 111213141516 ≤ 1 year1-5 years> 5 years ... by rate fixation period %, loans to non-financial corporations Source: ECB Research Deutsche Bank Jan Schildbach 16 June 2016 —Between 2012 and 2015, —bank loan outflows of EUR 302 bn in the EMU —compensated by inflows of EUR 323 bn from bond issuance —Narrow investor base limits further growth potential —Capital Markets Union a good opportunity to 1.allow for a more active involvement of pension funds in bond markets 2.reduce the mechanistic reliance on ratings 3.iron out duplications and overlaps in disclosure regimes Nevertheless, corporate borrowing has partly shifted to capital markets – but will it continue? 6 -200 0 200 400 600 0 40 80 120 160 06 07 08 09 10 11 12 13 14 15 Bond issuance (left) Bank loans (right) EUR bn, Net bond issuance (left), EUR bn, Bank loan flows (right) Sources: ECB, Deutsche Bank Research Euro area: Non-financial firms' funding shifts from loans to bonds Research Deutsche Bank Jan Schildbach 16 June 2016 Agenda 2 1 NPL impact on banks & customers Macro picture 7 Research Deutsche Bank Jan Schildbach 16 June 2016 Low rates have prevented a surge in delinquencies 8 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 2009201020112012201320142015 GermanyFranceUKEMU peripheralsBeneluxAustria/SwitzerlandNordics Corporate insolvencies in Europe Source: Creditreform in '000 Research Deutsche Bank Jan Schildbach 16 June 2016 9 ... which in turn helped stabilise/improve credit quality at banks 0 4 8 12 16 20 24 28 32 36 40 0 2 4 6 8 10 12 14 16 18 20 Q4 09Q4 10Q4 11Q4 12Q4 13Q4 14Q4 15 France*Germany* UK*US Italy*Spain PortugalGreece (right) Ireland (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 2010 Q4 2011 Q4 2012 Q4 2013 Q4 2014 Q4 2015 FranceGermanyUK USItalySpain PortugalGreeceIreland Total NPLs Sources: IMF, Banco de España, Deutsche Bank Research in billions of national currency Research Deutsche Bank Jan Schildbach 16 June 2016 Provisioning for loan losses remained a drain though, until recently – faster cleanup & recovery in the US 10 0 10 20 30 40 50 60 70 80 06070809101112131415 US banksLarge European banks Loan loss provisions USD / EUR bn, up to Q4 15 Sources: FDIC, company reports, Deutsche Bank Research 0.0 2.5 5.0 7.5 10.0 12.5 15.0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Q1 05 Q1 06 Q1 07 Q1 08 Q1 09 Q1 10 Q1 11 Q1 12 Q1 13 Q1 14 Q1 15 Residential mortgagesC&I CREAuto Construction (right)Credit card (right) Loan performance in the US: net charge-offs % ofoutstandingvolumes Source: FDIC Research Deutsche Bank Jan Schildbach 16 June 2016 Low rates have failed to support/hurt European banks in other areas 11 105 110 115 120 125 130 135 140 H1 09 H2H1 10 H2H1 11 H2H1 12 H2H1 13 H2H1 14 H2H1 15 H2 EUR bn, top 20 European banks Sources: Company reports, Deutsche Bank Research Net interest income -9 -6 -3 0 3 6 9 12 080910111213141516 USEuro area Lending to the private sector % yoy, up to Mar 16 Sources: ECB, FDIC, Deutsche Bank Research Research Deutsche Bank Jan Schildbach 16 June 2016 European banks are 4-5 years behind their US peers in the cycle 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 US banksLarge European banks Total revenues Sources: FDIC, company reports, Deutsche Bank Research Q1 2006 = 100, up to Q4 15 -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 US banksLarge European banks Net income Sources: FDIC, ECB, company reports, Deutsche Bank Research USD / EUR bn, up to Q4 15 Research Deutsche Bank Jan Schildbach 16 June 2016 Building up capital has thus been painful 13 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 % Core Tier 1/Common Equity Tier 1 ratio* of Europe's 20 largest banks * Basel II; Basel 2.5 applied from Q4 11 on, Basel III from Q1 14 on Sources: Company reports, Deutsche Bank Research 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 Total assets / equity capital Euro-area banks' leverage ratio Sources: ECB, Deutsche Bank Research Research Deutsche Bank Jan Schildbach 16 June 2016 With more tightening to come: Regulatory timeline 14 Source: Deutsche Bank Research Deutsche Bank Jan Schildbach 16 June 2016 Extraordinary macro environment: − Private-sector indebtedness has even deteriorated since the financial crisis − Deep crisis not yet overcome in Europe – US back on track, except for monetary policy Positive impact on borrowers: − Extremely low lending rates in Europe − Declining number of business insolvencies Mixed impact on banks: − Benefiting from improving asset quality & shrinking non-performing loans − However, still elevated level of problem assets and loan loss provisions in Europe − In addition, no pickup in lending and increasing interest margin pressure – in an ever tighter regulatory environment − Contrast to US: fall in margins more than compensated for by strong growth in credit volume Conclusion: Low rates helped customers, but EU banks still suffering from high level of non-performing loans 15 Research Deutsche Bank Jan Schildbach 16 June 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 16 June 2016 © Copyright 2016. 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