European Credit Risk Outlook. Results of the Sixth European Credit Risk Managers Survey

Transcription

1 report European Credit Risk Outlook Results of the Sixth European Credit Risk Managers Survey November 2012

2 European Credit Risk Outlook Contents Introduction...3 Summary...4 Key Findings and Analysis...5 Credit Delinquencies...5 DACH: Delinquencies...6 Iberian Peninsula: Delinquencies...7 UK/Ireland: Delinquencies...8 Credit Supply and Demand...9 DACH: Credit Supply and Demand...10 Iberian Peninsula: Credit Supply and Demand...11 UK/Ireland: Credit Supply and Demand...12 Interest Rates...13 Priorities for DACH: Priorities for Iberian Peninsula: Priorities for UK/Ireland: Priorities for Respondents Profile...18 Project Sponsors

3 Introduction There.was.very.little.new,.and.even.less.encouraging,.in.the.European.economic.and. political.realms.as.the.eurozone.crisis.dragged.on.through.the.summer.of.2012.and. into.the.fall..the.sixth.survey.of.european.credit.risk.managers.refl.ects.this.dismal. picture,.as.many.of.the.forecasts.for.credit.delinquencies,.demand.and.supply.changed. little.from.the.last.survey,.conducted.in.the.summer.. For.this.survey,.conducted.in.September.and.October.2012,.respondents.also.gave. a.glimpse.of.their.priorities.for there.were.wide.regional.differences.for.these. questions,.as.indeed.for.all.parts.of.the.survey,.but.we.can.draw.one.clear.message. from.respondents:.a.bank s.own.customers.must.provide.the.growth,.and.therefore. the.banks.must.do.a.better.job.of.building.customer.loyalty,.understanding.customers. needs.and.risk.and.improving.communications..to.that.end,.both.big.data.and.mobile. communications.will.be.of.great.interest.in.the.months.to.come. Findings.from.this.survey.will.in.turn.help.to.inform.the.Risk.Managers.Advisory. Council,.a.group.of.European.risk.professionals.formed.by.Efma.and.sponsored.by. FICO,.and.to.enliven.discussion.at.the.RMAC.meetings.. We.are.grateful.to.the.executives.from.across.Europe.who.put.forward.their.views.in. this.survey.. Frans Labuschagne Managing.Director,.EMEA FICO. Patrick Desmarès Secretary.General. Efma 3

4 European Credit Risk Outlook Summary FICO and Efma conducted a survey of credit trends in September-October 2012 with risk professionals in Europe. The aim of this survey is to provide a forward view of potential growth and challenges in the granting of consumer credit. Participants included credit-granting institutions ranging from local banks to global institutions. Around 70 representatives from 27 European countries and 55 companies responded to this survey. The survey asked participants for their forecast of credit risk and supply/demand over the next six months, and for their outlook for 2013 on several critical issues. Results of this survey show: Demonstrating a higher return on capital will be a top priority for 32% of banks and a priority for 71%. 61% of respondents say cross-selling products to existing customers will be a priority in 2013, since credit originations have stalled and credit growth will come primarily from existing customers 54% of respondents say analyzing Big Data to understand customers needs and risk better will be a priority next year At least 40% of respondents see delinquencies rising in the next six months on mortgages, auto loans, credit cards, small business loans and overdrafts. However, the respondents forecasting an increase in mortgage delinquency fell from 55% in the last survey to 44%. The biggest credit gap between demand and supply is now in consumer lending, where 35% of respondents see the amount of credit requested to rise, compared with just 15% who see the amount granted to rise. The credit gap for small businesses fell relative to the last survey. This report shares the key findings for all respondents, and in addition breaks out specific responses by three regions: DACH (Germany, Austria, Switzerland), the Iberian Peninsula (Spain and Portugal) and the United Kingdom/Ireland. Members of the Efma Risk Management Advisory Council will have access to more detailed of results of survey responses from enterprises in Turkey, Central and Eastern Europe and the Nordics. The European Credit Risk Managers Outlook was prepared by Efma and FICO. 4

5 Delinquencies Key Findings and Analysis Credit Delinquencies Looking at the banking industry in your region, over the next six months, do you expect: The level of overdrafts to The level of small business loan Increase significantly Increase somewhat Stay about the same Decrease somewhat Decrease significantly The level of auto loan The level of credit card The level of residential mortgage delinquencies (of 90 days or more) to 0% 10% 20% 30% 40% 50% 60% Delinquency forecasts are consistent with our last survey in July, with moderate increases projected across the board. While significant increases are not expected, it s worth noting that in every category at least 40% of respondents see increases coming, while at least 40% say delinquencies will stay at their current level. There are two conflicting forces at work: Most risk managers know the motto: The bad credit appears in time. As new credit openings are rare these days, the vintages in most portfolios are already mature. Most of the bad credit should have passed through already. A double-dip recession is here. Unemployment and reduced economic activity will still hurt credit portfolios. Risk managers face more customers that are depleted, almost bankrupt. These customers are also harder to collect from, and will demand more expert collections and recoveries strategies. Roll rates could rise (in fact, some regions are already seeing this phenomenon), increasing volumes and costs. FICO and Efma recommend revising operations and strategies to ensure that tight recovery controls are in place. Virtual and mobile collections efforts are rising, due to the low cost and high efficiency. Also, the use of external collection agencies is increasing, so lenders will need strong placement strategies and revenue optimization. 5

6 European Credit Risk Outlook DACH Delinquencies DACH: Delinquencies Looking at the banking industry in your region, over the next six months, do you expect: The level of overdrafts to The level of small business loan Increase significantly Increase somewhat Stay about the same Decrease somewhat Decrease significantly The level of auto loan The level of credit card The level of residential mortgage delinquencies (of 90 days or more) to 0% 20% 40% 60% 80% Optimism continues to wane in the DACH countries. Increased delinquencies are expected in mortgages, auto loans and overdrafts. The results for SME lending reveal mixed feelings. In the last survey, almost 50% of respondents believed delinquencies would rise that figure has been reduced to just 25%, but those respondents believe they will rise sharply. Credit card delinquencies follow the past survey with more expected reductions on delinquencies. This is quite normal, as it reflects the lower use of credit cards in the region. DACH feels the impact from weaker EU economies because of the effect on exports. The delayed economic stimulus from the European Union hurts even more. And new inflation figures in the Eurozone do not bode well. Risk managers here will focus on customer management to at least maintain existing profitability. No one expects increases in interest rates or fees, and the pressure on costs will remain or even increase. This is the time for banks to focus on increasing the share of the customer s wallet, using behavioral data to cross-sell and manage exposure across portfolios. 6

7 Iberia Delinquencies Iberian Peninsula: Delinquencies Looking at the banking industry in your region, over the next six months, do you expect: The level of overdrafts to The level of small business loan Increase significantly Increase somewhat Stay about the same Decrease somewhat Decrease significantly The level of auto loan The level of credit card The level of residential mortgage delinquencies (of 90 days or more) to 0% 20% 40% 60% 80% 100% In our last survey, respondents here were feeling slightly more optimistic about future delinquencies, as new economic policies were being tested. As time passed and the financial rescue for banks and the state are still being discussed, the old pessimism is back. There are no blue skies in sight, as once again nearly all respondents foresee increased delinquencies across all products. As this survey is being published, official economic figures from the Iberian Peninsula are displaying a rise in delinquency rates due to reduced economy activity and rampant unemployment. Collections and recoveries are the focus for risk managers, who must reduce costs while reaching the overdue customer faster. Collections are especially difficult as many delinquencies are due to lack of income, not reduced income. The best collectors are needed, with proper negotiation skills and strategies to reduce exposure, not just offer debt discounts. It s a challenge for tough professionals! 7

8 European Credit Risk Outlook UK Delinquencies UK/Ireland: Delinquencies Looking at the banking industry in your region, over the next six months, do you expect: The level of overdrafts to The level of small business loan Increase significantly Increase somewhat Stay about the same Decrease somewhat Decrease significantly The level of auto loan The level of credit card The level of residential mortgage delinquencies (of 90 days or more) to 0% 20% 40% 60% 80% As much as the last survey demonstrated the impact of the double-dip recession in UK/Ireland (which surprised some risk managers), this one reveals an outlook that has not changed much. Once again, the biggest shock to the system comes in mortgages, with a worrying 71% of respondents forecasting a rise, down from around 50% in the July survey. However, the forecast has brightened for small business loans. This survey reveals the ongoing challenge to risk managers. Delinquency figures are way above comfort levels. Also the reduction in credit granting (as represented later in this survey) make things worse portfolios are mature, the market is mature in risk management, and lots of behavioral data are available. This is not an easy market in which to develop innovative strategies, as most strategies have already been tested. That said, sophisticated optimization techniques can make a difference, and this is where the leaders in consumer lending will look to eke out better returns in such trying times. 8

9 Credit Supply and Demand Looking at the banking industry in your region, over the next six months, do you expect: The approval criteria for common credit & loan products to The average balance on credit card accounts to Increase significantly Increase somewhat Stay about the same Decrease somewhat Decrease significantly The volume of consumer The aggregate amount of credit requested by consumers to The approval rate of consumer The amount of consumer credit extended by lenders to The volume of small business The aggregate amount of credit requested by small businesses to The approval rate of small business The amount of small business credit extended by lenders to 0% 20% 40% 60% 80% These results have held much the same all year. However, the biggest credit gap between demand and supply is now in consumer lending, where 35% of respondents see the amount of credit requested to rise, compared with just 15% who see the amount granted to rise. On the positive side, fewer respondents believe that the credit extended will decrease in the next six months. This makes sense as markets and banks are now waiting to understand what will be decided on the Eurozone banks capitalization, and how this will impact credit lending. On the negative side, delinquencies are high and new credit is restricted not a good mix for profitability. Is the European lending machine broken? Not at all! It is time to look inside portfolios and understand how the Pareto rule can work to the banks benefit. Can risk managers increase share of wallet for the 20% of customers who represent 80% of profits? Can risk managers work on the other 80% to stop them eating profitability? And finally, can risk managers increase customer deposits, to provide a cheap source of new money to leverage new lending volume? FICO and Efma are seeing more banks focus on deposit optimization to do just that. 9

10 European Credit Risk Outlook DACH: Credit Supply and Demand Looking at the banking industry in your region, over the next six months, do you expect: The approval criteria for common credit & loan products to The average balance on credit card accounts to Increase significantly Increase somewhat Stay about the same Decrease somewhat Decrease significantly The volume of consumer The aggregate amount of credit requested by consumers to The approval rate of consumer The amount of consumer credit extended by lenders to The volume of small business The aggregate amount of credit requested by small businesses to The approval rate of small business The amount of small business credit extended by lenders to 0% 20% 40% 60% 80% 100% Again, the optimism in previous surveys from DACH is losing ground. At the start of the year, 11% of the risk managers were expecting a rise in credit demand from consumers, now that number has grown to 60%. However, just 20% say that the amount of credit extended will rise. On the SME side, credit demand will slow, but will at least be met by supply. SMEs in the DACH region seems to be in a waiting state, not willing to grow until a positive decision is reached on the rest of the Eurozone. But on the other side of the SME coin, lenders are willing to increase money to them: 25% believe that credit extended will increase compared with 10% in the last survey. This region forecasts the least change overall. 10

11 Iberian Peninsula: Credit Supply and Demand Looking at the banking industry in your region, over the next six months, do you expect: The approval criteria for common credit & loan products to The average balance on credit card accounts to Increase significantly Increase somewhat Stay about the same Decrease somewhat Decrease significantly The volume of consumer The aggregate amount of credit requested by consumers to The approval rate of consumer The amount of consumer credit extended by lenders to The volume of small business The aggregate amount of credit requested by small businesses to The approval rate of small business The amount of small business credit extended by lenders to 0% 10% 20% 30% 40% 50% 60% 70% The Iberian economic conditions continue to freeze both credit requests and approvals. The amount of credit requested will remain the same or reduce in consumer loans according to 80% of the respondents, and 66% say the same for small businesses. It s a vicious cycle: The economy is held back due to lack of credit available, and the poor economy continues to weaken credit. Risk managers can t change this scenario, unfortunately. The lack of EU resolve over the Spanish bailout, together with Portugal s recent economic measures, ties banks hands. This puts still more pressure on collections and recoveries. As noted before, enhanced strategies for placing accounts with external agencies are strongly advised, in order to reduce operational costs and increase recovery amounts. At the same time, tight controls must be kept on overall portfolio risk. 11

12 European Credit Risk Outlook UK/Ireland: Credit Supply and Demand Looking at the banking industry in your region, over the next six months, do you expect: The approval criteria for common credit & loan products to The average balance on credit card accounts to Increase significantly Increase somewhat Stay about the same Decrease somewhat Decrease significantly The volume of consumer The aggregate amount of credit requested by consumers to The approval rate of consumer The amount of consumer credit extended by lenders to The volume of small business The aggregate amount of credit requested by small businesses to The approval rate of small business The amount of small business credit extended by lenders to 0% 20% 40% 60% 80% 100% The order in this region is: Steady as she goes! Lenders are in turbulent waters but they appear to have settled on the right course through them. As discussed in the last survey, the Bank of England put in place new funding programs to increase lending, which means risk managers are under pressure from the business side to restart the credit process. The latest figures from the Bank of England showed modest growth as this survey was being prepared, lifting the UK from its double-dip recession. Lending has started to loosen up as a result. Efma and FICO still recommend intelligent lending practices, analytics and optimization to ensure that profitability will grow again. It is easier to tighten credit policies than to loosen them. A proper optimization practice can help risk managers reshape the rules without losing sleep. 12

13 Interest Rates Looking at the banking industry in your region, over the next six months, do you expect: Increase significantly Increase somewhat Stay about the same Decrease somewhat Decrease significantly 0% 10% 20% 30% 40% 50% 60% Interest rates are suffering from economic recession and inflation pressure. Indecision over bailouts and bond trading have prompted a wait and see attitude. Some analysts still foresee a reduction in rates in 2012, putting them at odds with risk managers, who largely see rates holding. Even if there is a reduction in the European Central Bank rate, banks may use this to slightly increase their spread so the street rate could remain the same. 13

14 European Credit Risk Outlook Priorities for 2013 Demonstrating a higher return on capital Cross-selling products to existing customers Top Priority Priority Business as Usual Not a Focus Increasing use of mobile channels for customer communication Extending more credit to consumers Extending more credit to small businesses Analyzing Big Data to understand customers needs and risk better Strengthening fraud protection across the enterprise Increasing capital to meet Basel requirements Improving the performance of our predictive models Stress-testing our credit portfolios for a possible Eurozone breakup 0% 10% 20% 30% 40% 50% This is the new question introduced by FICO and Efma in this survey. Here are biggest priorities for 2013, indicated by those areas where Top Priority and Priority results passed 50%: Stakeholders will request better returns, making this a top priority for 32% of banks and a priority for 71%. Credit growth will come primarily from existing customers, on whom banks have behavioral information, so cross-selling is a must. In order to cross-sell to customers, or even hold onto them, you have to know them better, which makes analyzing Big Data a priority for 54% of respondents. Bubbling under these three are two other trends. 49% of respondents see using mobile channels as a priority. And while the total priority results were just 40%, 21% of respondents see increasing capital to meet Basel requirements as a top priority. 14

15 This is a moment for creative thinking. The best risk manager is the one who reshapes the science and the practice to embrace new market moments and new methodologies. Is it time to reinvent? Not necessarily, but it is certainly time to secure existing practices with new points of view. Are analytics in place? Reshape them with Big Data and stress tests. Already have a strong fraud management practice? Strengthen it. Make the business as usual more efficient and pave the road for reinvention. The moment to reinvent the practice will come as soon as the economy turns the corner. DACH: Priorities for 2013 Demonstrating a higher return on capital Cross-selling products to existing customers Top Priority Priority Business as Usual Not a Focus Increasing use of mobile channels for customer communication Extending more credit to consumers Extending more credit to small businesses Analyzing Big Data to understand customers needs and risk better Strengthening fraud protection across the enterprise Increasing capital to meet Basel requirements Improving the performance of our predictive models Stress-testing our credit portfolios for a possible Eurozone breakup 0% 20% 40% 60% 80% DACH demonstrates its strength and conservative approach. Yes, the return on capital is important and to reach that goal more credit should be extended to consumers (less so for SMEs, interestingly). Mobile technologies are here to stay but wait and see what happens with Big Data analysis. The most interesting priority here is fraud protection. This reflects the massive migration of fraud away from the UK and into Germany over the past few years, as reflected in the FICO European Fraud Map. Also, while German banks have good use of predictive models, they clearly see the need for improving performance, as well as for stress testing in these troubled times. 15

16 European Credit Risk Outlook Is this a moment to be more bold? DACH is providing visible and important leadership across Europe. Promoting their own internal consumption through credit is a challenge due to debt-averse consumers and the state itself. Again, this is a creative thinking moment, calling for risk managers to reshape the science and practice to embrace new market opportunities and new methodologies. Iberian Peninsula: Priorities for 2013 Demonstrating a higher return on capital Cross-selling products to existing customers Top Priority Priority Business as Usual Not a Focus Increasing use of mobile channels for customer communication Extending more credit to consumers Extending more credit to small businesses Analyzing Big Data to understand customers needs and risk better Strengthening fraud protection across the enterprise Increasing capital to meet Basel requirements Improving the performance of our predictive models Stress-testing our credit portfolios for a possible Eurozone breakup 0% 10% 20% 30% 40% 50% 60% 70% This is the most challenging region for risk managers, and this is a divided moment for investments in new technologies, new decision models and fraud protection. Few things rose to the top priority status, but those that did cross-selling and Big Data indicate that getting closer to existing customers is urgent. So are improving fraud protection and model performance. The answers from respondents show that there are two classes of banks: the ones that are fit in their regulatory approach and ready to demonstrate this to stakeholders, and the ones that still wait for the official support from EU. And, as the decisions are taking time to be implemented, the skepticism over the Eurozone is quite high. 16

17 UK/Ireland: Priorities for 2013 Demonstrating a higher return on capital Cross-selling products to existing customers Top Priority Priority Business as Usual Not a Focus Increasing use of mobile channels for customer communication Extending more credit to consumers Extending more credit to small businesses Analyzing Big Data to understand customers needs and risk better Strengthening fraud protection across the enterprise Increasing capital to meet Basel requirements Improving the performance of our predictive models Stress-testing our credit portfolios for a possible Eurozone breakup 0% 20% 40% 60% 80% 100% Compare this graph with the Credit and Supply graph and the conclusion is similar: Steady as she goes. The conclusions here are: High capital return matters, though as many banks have reached the Basel requirements investors are already convinced on the proposed return. Banks realize the importance of getting more credit to consumers and small businesses. This region s banks want to take Europe s lead in analyzing Big Data, and using mobile channels to reach customers. Stress tests are done and ready to be implemented if the Eurozone breaks up. The UK and Irish banks are doing exactly what FICO and Efma would recommend: Follow intelligent lending practices, and use advances in technology to simulate profitable lending. 17

18 European Credit Risk Outlook Respondents Profile Respondent Area Respondents to the fourth European Credit Risk Managers Survey comprised about 70 individuals from 27 countries and 55 companies. Respondents included representatives from smaller institutions as well as global banks, and the majority (80%) are from full-service banks. Respondent area of responibility Credit/ Debit Cards Mortgages Auto Loans Current Accounts Lines of Credit Small Business CIO/ IT CFO/ Finance Number of Employees Number of Employees 50, ,000 3% Over 100,000 12% 10,001 50,000 28% 1 5,000 49% 5,001 10,000 8% The diversity of size is reflective of the European banking market, and is representative of the Efma membership. 18

19 Retail Customers Number of retail customers 1 50,000 9% 50, ,000 7% Over 5 million 29% 250, ,000 9% 2 million 5 million 16% 1 million 2 million 18% 500,001 1,000,000 12% Business Orientation business orientation Mortgage Lender 3% Retailer or Finance Company 15% Credit Card Monoline 2% Full-Service Bank 80% Respondents are overwhelmingly affiliated with full-service banks, giving the sample a high degree of homogeneity in business orientation. This means that while there will be regional differences and differences of opinion borne from product diversity, the type of issues experienced by the respondents as full-service banks operating in Europe should be expected to be fairly consistent. 19

20 European Credit Risk Outlook Country Respondent country of respondent United Kingdom/Ireland 11% Benelux 9% Other European 57% Turkey 6% DACH Region 8% Bank Operating Region Iberian Peninsula 9% bank operating region Global 8% Multi-Country 42% National 50% Again, the multi-national focus of respondents reflects the make-up of the European banking structure. 20

21 Project Sponsors FICO (NYSE:FICO), formerly known as Fair Isaac, delivers superior predictive analytics that drive better decisions. As a pioneer in applying mathematics to solve business problems, FICO gives businesses the power to make more effective decisions based on sharper forecasts of consumer behavior. FICO s revolutionary solutions include the leading credit scores as well as leading global solutions for credit account management and fraud management. Most of the world s top banks, as well as leading insurers, retailers, healthcare and pharma companies and government agencies, rely on the analytic advantage of FICO solutions to accelerate growth, control risk, reduce costs and meet regulatory and competitive demands. FICO 5th Floor, Cottons Centre, Hays Lane London SE1 2QP United Kingdom Tel: +44 (0) As a global not-for-profit organisation, Efma brings together more than 3,300 retail financial services companies from over 130 countries. With a membership base consisting of almost a third of all large retail banks worldwide, Efma has proven to be a valuable resource for the global industry, offering members exclusive access to a multitude of resources, databases, studies, articles, news feeds and publications. Efma also provides numerous networking opportunities through working groups, online communities and international meetings. Efma 8, rue Bayen Paris France Tel: +33 (0) For media inquiries on this report, please contact: Irina McGurk, Catalysis, +44 (0) , fico@catalysis.co.uk. Karine Coutinho, Efma, , karine@efma.com 2012 Fair Isaac Corporation. All rights reserved. This report should not be reproduced or redistributed, in whole or in part, without the written permission of FICO. 21

22 European Credit Risk Outlook Results of the Sixth European Credit Risk Managers Survey November 2012