The retail credit market has seen modest growth since the credit crisis, up 9% from €9.3 trillion in 2007 to €10.1 trillion in 2013. However, since the crisis particularly southern European countries have seen considerable rises in non-performing loans, with 18% of Italian and 12% of Spanish retail credit non-performing, with Europe hereby still having some ways to go to be back to pre-crises stability levels.
In a recently released report, titled ‘European Retail and SME Credit: Recovery Time?’, consulting firm Oliver Wyman and Intrum Justitia joined forces to explore key trends and the current standing of the retail credit market in Europe, as well as possible projected courses based on country specific models. This study covers 26 European countries, and Russia and Turkey.
The report looks at three different kinds of credit, which includes consumer finance products: such as all non-mortgage retail lending, including personal loans, revolving credit, and loans linked to specific purchases (such as auto loans and point-of sale finance); SME loans; and Mortgages, which include all retail lending secured on residential property. These three categories of credit are taken together to be synonymous with ‘retail credit’.
The current retail credit market
Since 2007 total outstanding retail credit has grown by 9%, with mortgages (at an annual growth rate of 3-4%) making up the most significant part of the growth. During the period the CAGR on personal loans has averaged around 1%, while SME loans, after contracting during 2007-2010, have since remained flat.
There is however variation between ‘developed countries’ (those with GDP per Capita > €15,000) and ‘emerging countries’, those with less. Between the two groups' markets, the SME loan market shows the most considerable variation, with developing countries contracting -6% between ’07 – ’10 and -2% between ’10 – ’13, while for emerging countries the market expanded markedly, up by 4% in the first period and 15% in the second. Mortgages in both emerging and developed countries continue to grow apace, with developed countries’ debt up from €5.4 trillion in 2007 to €6.9 trillion projected for 2016, where in emerging markets mortgage debt will grow from €100 billion in 2007 to €300 billion in 2016.
For developing countries the expectation is that overall retail credit growth will pick up from the more reserved levels of the past years as consumer confidence and needs grow. In emerging countries the growth in the retail market is expected to be higher into the near future, with borrowers bringing forward purchases on the back of future expectation in the growth of GDP.
The analysis finds that many of the European countries investigated have retail credit balances that are well above 100% of GDP, with Switzerland, Denmark and Cyprus as examples where debts are around 120%, 150% and 160% respectively. Most emerging European markets have a ratio of around 35% of GDP. The situation for the UK is currently relatively stable, with flat growth its retail credit which stands at around 80% of GDP.
The report highlights that the number of non-performing loans (NPL) varies greatly across European markets, asset classes as well as between stock and flow. With southern European countries showing the highest ratios of NPLs, while Nordic countries and Switzerland are on the other end. Overall SME loans have the highest rate of NPL in the retail credit segment.
Of NPLs 90% are found in developed countries, with Italy holding the largest stock of NPLs at €161 billion, or 18% of the stock – with SME loans making up 78% of the NPLs. Spain is second in terms of volume, with €105 billion of NPLs, followed by France with €44 billion in NPLs. The UK has a mere 3% of its loans as non-performing, with mortgages the main issue.