The overall message in an Ernst & Young forecast for the financial services sector in the eurozone is that the worst is over and the situation will continue to improve in 2014. Reductions in assets held by banks are expected to be less this year than last, before returning to growth in 2014. Lending should also stabilize in 2013 before expected growth next year.

The Ernst & Young report, as in other recent forecasts, highlights a North-South divide in the eurozone's financial services sector. Apparently all Member States are not equal when it comes to financial fortunes. “There is a sense that the eurozone financial sector has overcome most of its issues. However, the forecasts are divided between North and South as well as between large systemic financial institutions which continue to strengthen and smaller banks for which the outlook is less certain,” said Assurance & Advisory Partner at Ernst & Young Romania Gelu Gherghescu.

Deleveraging in the eurozone's banking system is slowing with the “most challenging phase” already over, according to Ernst & Young. After total assets in the eurozone banks contracted by EUR 856 billion in 2012, the fall this year is expected to be some EUR 500 billion and the forecast predicts growth in assets in 2014.

Lending in the eurozone is also predicted to fall this year, by some 0.5 percent according to Ernst & Young, but should return to growth in 2014. Non-performing loans are set to peak in 2013, before steadying next year. In Romania, the lending market will be somewhat sluggish and will not contribute significantly to a reduction in the level of non-performing loans. “In Romania I’d rather expect no lending growth during the next nine months, with a slight growth of lending to businesses and a stronger one for mortgage loans but a decline of consumer loans,” said Gelu Gherghescu.

He explained that the knock-on effects of even an increase in lending would not make much of a difference to the growth in non-performing loans in Romania. “The non-performing loans will continue to grow during the next 6-9 months. Consequently, as regards the evolution of lending and non-performing loans we are to some extent in a vicious circle,” said Gherghescu.

The Ernst & Young study warns insurers to be vigilant over potential interest rate changes. Although deemed an “outside risk,” the report suggests that faster than expected eurozone growth would trigger higher inflation and an increase in interest rates set by the European Central Bank (ECB). In Romania, “such a scenario should also lead to a reduction of the country risk spread for fixed income instruments, including Romanian treasury bonds, compensating partly for the increase in the market rates,” said Gelu Gherghescu.

Ernst & Young's Eurozone Financial Services Forecast, published today (April 9 ), makes reference to the recent Cypriot banking crisis. Although clearly a serious problem for the island's economy, “the market response to the Cypriot debt crisis was actually fairly encouraging in that it demonstrated that the major European economies are now quite well insulated from national crises in smaller states,” said Andy Baldwin, the Head of financial services, Europe, Middle East, India and Africa at Ernst & Young.

Ernst & Young is an international professional services firms with approximately 167,000 employees in 700 offices across 140 countries, and revenues of approximately $24.4 billion in 2012. In Romania, Ernst & Young set up in 1992 and now has over 500 employees in Romania and Moldova. Locally, the firm provides assurance, tax, transactions, and advisory services to clients ranging from multinationals to local companies. The company has offices in Bucharest, Cluj-Napoca, Timisoara and Iasi, in Romania.

Liam Lever, liam@romania-insider.com