Despite a negative economic outlook, a survey on European credit risk suggests that consumers are set to demand more credit, while banks are willing to encourage this demand. Sara Perria looks at the consequences of this trend.
The credit gap between credit supply and demand is expected to fall sharply in the year ahead, a survey among credit risks professionals across Europe found.
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The seventh European Credit Risk Survey, by predictive analytics provider FICO and decision management software company Efma, was completed by 130 credit risk professionals from 41 countries and aims to measure retail bankers’ outlook for the availability of credit and their investment priorities for the year ahead.
Results showed a consistent pattern in the behaviour towards consumers and small business.
As for consumers, the gap between the projected request of credit and the projected supply amounted to 4 percentage points: 30% of respondents projected an increase in the amount of credit requested and 26% an increase in supply. The result is significant when compared to that of the autumn 2012 survey, when the spread between projected demand and supply was a full 20 percentage points.
For small businesses, the gap was even smaller. In the 2013 survey, 31% of respondents reported that they expect the aggregate amount of credit requested by small businesses to increase, and 29% expect the amount granted by lenders to increase as well.
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By GlobalData"Most of the new business growth in our corporate sector is coming from the SME segment," said Cüneyt Sezgin, board and audit committee member at Turkey’s Garanti Bank in the FICO/Efma report.
"Loans represent the primary relationship between banks and SMEs, as other financing alternatives for smaller companies are not well-developed in this market. Cash loans to SMEs represented 37% of total Turkish lira cash loans in 2012, and this ratio has been continuously increasing."
Mike Gordon, senior vice president for FICO sales, services and marketing said: "Despite the economic challenges in many countries, lenders are telling us they are prepared to meet a modest increase in credit demand."
"Given last month’s report that European banks have dramatically cut their Basel III capital shortfall, it appears that they gradually may be able to make more capital available for borrowers."
FICO and Esma highlighted there are loud calls in several countries for banks to loosen the purse strings and extend more credit to consumers and small businesses.
Managers’ responses show the relative importance placed on consumer credit risk models, collection models, fraud models and the use of optimization to improve lending strategies.
European bankers indeed also laid out their priorities for investment in analytics.
More than 40% of respondents reported they will invest in improving their analytics, with the highest priorities being credit risk models for both new credit applicants (61% of respondents) and existing customers (50%). In addition, 38% of respondents said they will increase their investment in risk analytics that incorporate Big Data.
Manuel Goncalves, director of the Risk and Decision Models Unit at Portugal-based Millennium bcp said: "Although consumer lending is a mature process using analytics to support risk classification, marketing, underwriting and authorizations, predictive models must constantly be calibrated to accommodate changes in consumers’ behaviour."
"These changes are driven not only by the adverse economic context but also by greater mobility and social networking. At the same time, there are new and richer sources of data that can be used to improve risk management and deliver a better customer experience."
The delinquency forecast was nearly unchanged from the last survey, with at least 40 percent of respondents forecasting an increase in delinquencies during the next six months on mortgages, credit cards and small business loans. "We don’t expect a reversal of this trend until the economies of Europe show greater recovery," said Patrick Desmarès, secretary general of Efma.
"That said, Europe is a heterogeneous region, with some countries preparing for a triple-dip recession while others, such as Turkey, look quite robust. The uncertainty across much of the region is particularly challenging for multi-national banks."
For example, bankers in the Iberian region continue to be pessimistic about both supply and demand. Tight economic measures have brought GDP reduction, unemployment, increased loss forecasts and credit supply and demand gaps.
Since the last survey Spanish banks were rescued, the government is apparently out of the bailout risk and Portugal is improving its economic performance. But again, this does not yet help risk managers, who will continue their tight control over their portfolios. Economic growth is a must, to reduce youth unemployment and avoid creating a "lost generation" that will decrease future revenue for banks.
UK bankers indicate instead they will respond to Bank of England incentives for new lending, which translates here to a forecast for a very low credit gap.
