New Financial Services research report from Business Monitor International is now available from Fast Market Research

Boston, MA -- (SBWire) -- 07/24/2012 --Eurozone Core Status To Underpin Banking Sector Stability BMI View: Declining loan growth and a virtual standstill in asset growth in Germany's banking sector highlight the increasingly challenging environment in which German banks have to operate. Although we expect this trend to continue over the medium term, we note that we continue to lean towards a 'muddle through' scenario for the eurozone and observe that Germany's deposit base continues to rise. As a result, and with capital buffers growing, this should underpin banking sector stability over the coming years. German banks will continue to face a challenging operational environment as they contend with prospective write-downs on European sovereign debt holdings and a very low economic growth environment over the coming years. Even under a best-case scenario in which policymakers come up with sufficient political resolve to confront the eurozone's structural shortcomings over the next few years, banks will continue to face regulatory pressure to maintain high capital adequacy ratios under Basel III. Since late 2010 the build-up of equity capital by German lenders has been remarkable, with monthly average growth in capital measuring 5.5% year-on-year (y-o-y) in 2011. Source: Bundesbank, BMI At the same time, banks' asset growth almost came to a standstill towards the end of 2011, according to data from the Bundesbank. This was due on the one hand to sovereign debt write-downs and on the other a decline in client loan portfolios across the board. While it may seem counterintuitive at first that Germany Commercial Banking Report Q2 2012 © Business Monitor International Ltd Page 24 German bank lending is declining at a time of record unemployment and robust economic growth, business and consumer confidence have been overshadowed by the ongoing eurozone sovereign debt crisis and uncertainty over the state of the economy in 2012. Moreover, with banks gauging the implications of a potential hard default by Greece, the prospect of further contagion and a deadlock in negotiations with Athens over private sector involvement (PSI), banks have been equally keen to hoard cash reserves as many German businesses have, rather than readily making new loans available to households and corporates alike. We further note that the true picture of asset growth in Germany in 2011 has been masked by a change in accounting standards for 'other assets', which - since end-2010 - have started to take into account financial derivative instruments, previously omitted from this category of bank assets. As the base effects from the sharp spike in 'other assets' have unwound from y-o-y growth readings, overall asset growth in Germany's banking sector has come down sharply. Source: Bundesbank, BMI Going forward, we expect this trend to continue and do not rule out overall asset growth to follow y-o-y growth in client loans and bond portfolio holdings into negative terrain. Client loan gr

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