There was a slight recovery in economic activity in the euro zone in the first quarter of 2014 (GDP quarter-on-quarter growth of 0.3%). However, there are two risk factors that could derail this recovery: the strength of the euro exchange rate, which could compromise the good performance of European exports; and the recent geopolitical tensions in Eastern Europe, which could have an impact in terms of economic activity and financial stability if, contrary to expectations, they increase.
As regards the area’s financial system, the highlights are:
- Key progress toward banking union: the European Commission and Parliament have reached a provisional agreement on the creation of the Single Resolution Fund.
- Comprehensive assessment process for the 128 banks that at the end of 2014 will be subject to ECB supervision: the process for selecting the asset portfolios subject to review has been completed, and the analysis itself (asset quality review, AQR) has begun. Its methodology was announced on March 11. The stress test that will follow the AQR is being developed in collaboration with the EBA. The test methodology is currently under review and the final version and the details of the macroeconomic scenarios are expected to be released before the end of April.
Following several quarters marked by macro-political uncertainty, Turkey is now in a period of greater stability. On the macroeconomic front, the more orthodox monetary policy of the Central Bank (CBRT) and the Fed’s increasingly clear roadmap in terms of its monetary policy suggest a less volatile environment. On the political front, the comfortable victory at state level of the current ruling party in the local elections held at the end of March has been interpreted positively by the markets because of the reduction in political uncertainty it entails.
The Turkish financial sector maintains sound levels of capitalization and a high level of profitability, although the recent toughening of monetary policy measures and upward interest rate movements in the quarter are resulting in an increase in the cost of deposits and squeezing momentarily the margins of banking institutions. Worth mentioning in business activity is the moderation of the rate of growth of lending, mainly in the consumer finance and credit cards segment, while fund gathering in the private sector continues to grow at over 20% in year-on-year terms. The NPA ratio remains stable at close to 3%.
In China, business activity is showing signs of a slowdown, due partly to the measures implemented by the government to deal with the weaknesses of the economy, in particular, the growth in lending through the so-called “shadow banking” and local government borrowing. Over the quarter, the authorities extended the fluctuation band for the exchange rate, while the Chinese currency’s trend to appreciate against the U.S. dollar has been halted.
As for the financial sector, the latest available figures (December 2013) confirm a moderation in lending growth, though it is still at very positive levels (up 14.5% year-on-year). Net interest income remains stable, due partly to the delay in the liberalization of interest rates on deposits. Asset quality remains under control, with the NPA ratio close to 1%, despite the increase in non-performing balances. The indicators on liquidity and solvency are good, with a loan/deposit ratio of 66% and capitalization levels of 12.2% (CAR under Basel III).
To better understand the changes in the business figures, the percentages given below refer to constant exchange rates, unless otherwise indicated.
