FINANCE INDUSTRY IN EUROPE

Introduction to Finance Industry

The new strict regulatory realities, the demanding economic environment and the growing needs of customers are changing the landscape of the financial sector in a dramatic way in Europe. Setting out the real sources of competitive advantage in these kinds of easily transforming situations can be very important.

Europe has a well-developed financial sector. Many European cities are financial centres with the City of London being the largest. The European financial sector is helped by the introduction of the euro as common currency. This has made it easier for European households and firms to invest in companies and deposit money on banks in other European countries. Exchange rate fluctuations are now non-existent in the Eurozone. The financial sector in Central and Eastern Europe is helped by economic growth in the region, European Regional Development Fund and the commitment of Central and Eastern European governments to achieve high standards. European banks are amongst the largest and most profitable in the world. The assets of the financial sector in Central Europe have risen each year by an average of 8.0% to reach around EUR 893.4 Billion.

Banks and insurance companies have huge balance sheets and those balance sheets matter hugely. Relatively small changes in the balance sheet can have an enormous impact on earnings. Future cash flows are very much dependent on the financial instruments on banks’ and insurance companies’ balance sheets.

In this Report we will study about the role of Financial Sector services and finance industry in European region.

Europe Finance Industry

The association for financial markets in Europe Securities Industry and financial Markets association (SIFMA), Asia securities and Industry and financial markets association (ASIFMA) and Global financial markets associations (GFMA) advocates stable, competitive, and Sustainable European financial markets that support economic growth and benefit society.

The global banking sector has faced a series of problems since 2008 that have decimated the overall net profit of the sector to just 10% of its previous level. Central European banks faced the same difficulties of falling profitability, but the nature of the process differed from country to country. In Europe asset growth was down 0.5% due to

Concerns about Eurozone debt.

The financial industry spends more than €120 million per year on lobbying in Brussels and employs more than 1.700 lobbyists to influence EU policy-making.

Since 1998 the European Union has used a set of financial instruments (guarantees and venture capital) to increase the volume of finance available for Small businesses. Since then, about 360,000 small businesses have benefited from the guarantees provided by the European financial instruments.

The financial sector of all EU countries is in a transitional level and the traditional banking institutions have suffered competitive pressures by a new form of banking institutions, as well as by non banking financial companies which had important consequences on the structure of the banking sector.

Europe Finance Industry Continue……

Universal banking is already a propensity in European countries with increasing rates which are required to continue. The main attribute of the European market is the ongoing incorporation of the economical industry via mergers and acquisitions, attendances or combined projects, between financial institutions, insurance coverage's and other financial institutions (ECB, 1999).

The new European market appears to motivate significant economical groups with simply classified actions. These actions are performed by specialized, semi-independent divisions or additional companies. This technique improves the degree of monopoly with a less noticeable way. The Group regulation prohibits monopolistic methods in the making of services. However, such methods are difficult to be identified. Consequently, this type of technique is not straight opposite to the Group directives, even if it can lead to monopolistic situations in local level, or even if the European financial market is not covered with a single economical company.

Some difficulties are common across the world. New technological innovation endanger to affect retail store economical solutions business models in designed and creating marketplaces as well. In general financial, the pressure of improved working and investment costs presage a shake-out of potential which is already reducing market assets and, especially in European countries, reducing access to credit for non-rated companies. In insurance worldwide, the focus must be on finding maintainable productivity and growth, and on cautious managing of both the uncommon interest rate environment and investment marketplaces movements on the balance sheet.

Other difficulties are more local. The efficiency of economical companies is always associated to the efficiency of the actual economical systems they serve – as some put it, economical solutions is a utilized bet on the actual economic system. But national home is a more important aspect in a economical institution’s efficiency nowadays than at any time during at least the last many years. This is especially true for financial institutions. Put simply, poor organizations in good economical systems can improve nowadays than well-run organizations in having difficulties economical systems. At a more macro level, economical companies in growing marketplaces are doing well while many of those in the most designed economical systems battle to return the cost of their investment.

Europe Finance Industry Continue……

The changes in profits from pre-crisis days are striking. All geographies show effective revenue and operating income – in some cases amazingly so. Even in European countries, banking earnings have grown since the crisis. But ongoing credit score failures and reorientation costs in European countries, and regulating charges and higher capital minima in both European countries and North The united states, are reducing profits in those areas. Latin America and most of Asia Pacific (outside Japan, Korea and Taiwan) remain high-return marketplaces for the time being (although foreign firms can suffer in many markets), with some likely at not sustainable levels. Returns in insurance have also languished with property and victim industry profits Sydney and North America are significant exclusions. Still mainly motivated by the underwriting cycle and life insurers’ performance motivated by credit score, interest rate and equity marketplaces. The industry has experienced little by way of top quality or assessment growth over the last several years.

As a result, Europe Firms are particularly divergent. Europe Firms standing on the threshold of once in-a-generation restructuring; the challenges of decoupling from sovereign credit risk and the transition to European Banking Union still uncertain; and with an insurance industry potentially hampered in its global competitiveness by stringent regulation.

Loans, guarantees and equity

CIP Financial instruments: The EU provides funding for small businesses via financial institutions in the Member States. The Financial Instruments Financial of the Competitiveness and Innovation Programme (CIP)  help SMEs raise equity and debt finance. With a budget of over one billion euro, these instruments should help about 300 000 to 400 000 SMEs to access funding by 2013.

Global loans: The European Investment Bank and the European Investment Fund also have lending and investment programmes that can benefit small businesses. These programmes can be accessed via financial institutions in the Member States.

Bank Loan & Guarantees

Europe Finance Industry Continue……

Risk Capital Loan Finance

• Better Governance• Capacity Building

• Cross Investments • Microfinance

• Round Table of Banks / SMEs

• SME Guarantees

Public Stock Markets

Entrepreneurs, Friends, Family

Seed & Early Stage Venture Capital Funds

Formal Venture Capital Funds

Business Angels

• Seed Business• Business Angels

• High Growth Innovative

SME Scheme (GIF)

Pre – Seed Phase Seed Phase Start – up Phase Emerging Growth Development

SME development stage Valley of Death

HIGHER RISK LOWER RISK• Policies • Financial instruments

SM

E R

even

ue

Loans, guarantees and equity Continue….

The problems of 2008 has brought Europe to a depression. There are has been separated between a “Centre” with financial and governmental power, and a “periphery” with no governmental impact, great community financial debt, great lack of employment and no hope for restoration. This polarisation is obvious in Eurostat data about commercial manufacturing. Unemployment in European countries has increased considerably due to the credit crunch and global recession after 2008 crisis. As the “Centre” has mostly maintained its commercial base and increased its exports to the “periphery”, nations are likely to face increasing trade instability within Western nations that in the gradual nations might be resolved either by continuing austerity guidelines - disappointing earnings and imports -, or by restored capital inflows further growing community and private financial debt. In both cases, Europe’s outside is going towards a manage of failures of income, tasks, manufacturing and exports.

Moreover, the consequences of the problems is likely to be noticeable by a more polarised commercial structure, where poor nations, areas, sectors and firms become gradual, and where also the “Centre” may be left with lower requirement, and a reduced ability to create new technological innovation and economic activities. With a economic downturn of overall development in Europe and economic decrease impacting several areas of its “periphery”, change is likely to become more challenging. Western nations as a whole would be trapped in its traditional financial velocity – with gradual markets, a heavy ecological pressure, and growing inequality - while other advanced and growing nations may move quicker towards new knowledge, new products and procedures, new sources of employment, reinforced by quicker requirement characteristics. The opportunity to create in Western nations a new velocity of development based on eco-friendly actions and greater social rights would become more challenging to engage in.

Depression and Polarisation

Demographic Trends

Demographic change on EU level: the challenge

Europe has a population of approximately 500 million people. As the figure below shows, according to the predictions by the United Nations – which are more negative concerning the timing of population decline than the forecasts by Eurostat1 – increasing life expectancy will not be enough to counterbalance low fertility rates (there is a natural decrease predicted to start in 2010), and the positive migration balance can only mitigate this process until approximately 2025. By that time, the population of the EU may reach 520 million, from which level it will begin to decrease.

1950-1955

1955-1960

1960-1965

1965-1970

1970-1975

1975-1980

1980-1985

1985-1990

1990-1995

1995-2000

2000-2005

2005-2010

2010-2015

2015-2020

2020-2025

2025-2030

2030-2035

2035-2040

2040-2045

2045-2050

-3000

-2000

-1000

0

1000

2000

3000

4000

Natural Increase Net Migration Population Change

The composition of population change in the EU

EU 27

Source: United Nations 2008 1.According to the latest Eurostat forecast, population decline in the EU will only start in 2040. This is a modification of their previous prediction, which put this date at 2025, like the UN.

Demographic Trends Continue…..

There is evidence of a turning point in behavior, as strong global markets have slightly diminished investor fear factor over the past year and provided the sense of comfort most investors still rely on. Two-thirds of investors worldwide say that asset growth is increasingly a priority over asset protection. In Europe 71 percent of investors still are unwilling to increase risk, up from 68 percent a year ago. in Europe, more investors have turned to advisors over the past year, but fewer have an ongoing relationship with a dedicated advisor. With the exception of the U.K., European investors are least likely to have clear financial goals or a financial plan.

European investors are most affected by the economic turbulence happened in last five years hence, they are more likely to invest in secure financial instruments. Europe including United Kingdom measures second highest in taking minimum investment risk and ready to sacrifice returns (%). Below exhibit shows details worldwide:

Demographic Trends Continue…..

Investment Fund Assets by Geographical Breakdown of AUM at end 2012 (EUR billion)

European professionally managed investment funds totaled EUR 7.4 trillion at end 2012 (see table). Total AUM of investment funds increased 13% in 2012, due to a turnaround in investor sentiment in Europe, after the ECB committed itself to do “whatever it takes” to save the euro.

The largest financial centers (the UK, France and Germany) managed 61% of European investment fund assets at end 2012. The relatively high market share of the rest of Europe (32%) is largely attributable to other countries with large fund management, such as Switzerland and the Nordic countries, as well as Luxembourg and Ireland, where some investment fund assets are also managed.

Country AUM AUM % Change1

Market Share

AUM/GDP

UK 1,688 11% 23% 87%

France 1,482 5% 20% 73%

Germany 1,329 18% 18% 50%

Italy 245 19% 3% 16%

Belgium 103 3% 1% 27%

Austria 84 11% 1% 27%

Netherlands 69 7% 1% 11%

Portugal 18 -4% 0.24% 11%

Turkey 14 -12% 0.19% 2%

Hungary 12 13% 0.16% 12%

Greece 6 15% 0.07% 3%

Rest of Europe2

2,364 17% 32% 62%

Total 7,413 13% 100% 52%

1 .End 2012 AUM compared to end 2011 AUM.2 .Including Bulgaria (EUR 247 million) and Romania (EUR 2.1 billion).

Investment funds AUM increased throughout much of Europe, with only a few exceptions. Italy led the way with growth of 19%, followed by Germany (18%), thanks to strong growth of investment funds reserved to institutional investors. The UK registered a growth of 11% and France saw its investment fund AUM increase by 5%.

When comparing AUM to GDP it can be seen that investment fund assets managed in the UK represented 87% of GDP, compared to 73% in France and 50% in Germany. These high ratios reflect the importance of the asset management industry in general in these countries as well as the ability of their asset managers in attracting assets domiciled abroad. They also explain why the European average is relatively high (52%).

Demographic Trends Continue…..

Investment Fund Assets by Geographical Breakdown of AUM at end 2012 (EUR billion) Continue….

Trends

Trends

The Structural Change in the

National Banking Markets

The Ideal Organisational

Model

Deregulation

Public Sector Role

Mergers and Acquisitions

The European Committee

and the Cross-Border

Extension

Financial Innovations

Trends Continue…..

The Structural Change in the National Banking Markets :

At nationwide stage, Financial institutions react to the new European environment with mergers, products or even alliances, which are sucked in order to strengthen their industry position and to avoid new competitive demands from overseas. Two are the main propensities that exist together. The first represents mergers and products that create powerful economical groups capable of competitive at a nationwide stage. The second concentrates on building up the role of smaller, modern and versatile banks with specialized production and a variety of innovatory products and services, and on internally connected their network with significant economical Units. The rearrangement of the Western economic climate at nationwide stage includes a rapid reduction of the variety of separate banking organizations and the mustering of industry control in a minimal variety of organizations. The degree of centralization in EU as a total is really unimportant. Difference seems to control the behavior of credit organizations due to the denormalisation that removed the restriction among the different types of financial institutions.

Mergers and Acquisitions :

The earnings that may occur from mergers and acquisitions can be remarkable. Proportionate, however, is the risk that may result to the decrease of shareholders’ value. The significance of the shareholders’ value provides consistently increasing significance, to be able to spread prosperity and capital to investors. A successful incorporation needs precise ideal planning, after real key value motorists have been examined to make sure best quality. Major products make sure financial systems of range and an opportunity to get into other marketplaces. Additionally, it reimburses the negative results of improved competitors within an atmosphere of low interest-rates.

Trends Continue…..

The Ideal Organizational Model :

The appropriate organizational model is targeted on the development of a financial group with a number of subsidiary companies that offer all the financial solutions with efficiency and versatility, working almost autonomously under the control of the spend company, which is usually a bank, while its network comprises the basic way for the total marketing of the team. This efficient freedom decreases the prospect of interests’ issue and helps the guidance of banking organizations by supervisory regulators. The new Western industry appears to motivate significant economical categories with simply classified actions. These actions are performed by specialized, semi-independent divisions or additional organizations. This technique improves the degree of monopoly with a less noticeable way. The Group regulation prohibits monopolistic methods in the making of solutions. However, such methods are difficult to be identified. Consequently, this type of technique is not straight opposite to the Group directives, even if it can lead to monopolistic situations in local level, or even if the Western economical industry is not covered with a single economical company.

The Role of the Public Sector :

The public sector facilitates and impacts the improvements that take place in the financial system. The government authorities of all EU nations implemented important changes in their regulation, seeking at the methodical decrease of the government interventionism, in order to accomplish the re-composition of the financial program. The adverse impact on productivity of financial institutions, which is due to the administration of competitors and to the trend of arbitration was counterbalanced by beneficial financial circumstances designed by the decrease of interest-rates, which improved their financial commitment earnings, and their financial commitment financial income. The release of a common currency improved and multiplied the existing propensities. The inversion of competitors circumstances motivates the relatively tremendous dimension but also the variety of the actions so that the exploitation of financial systems of range and variety to be obtained, and also the synergies that occur from the cross-selling and the multidimensional customer service.

Trends Continue…..

The European Committee and the Cross-Border Extension :

The regulation of the European Union as well as the organization of the common currency have designed new marketplaces and offered new possibilities for cross-border actions. According to the European Committee cross-border mergers and acquisitions will regularly become more eye-catching. Most cross-border dealings do not include an important change of possession or control .Obviously this technique does not provide banking organizations with comprehensive systems of additional companies. Cross-border mergers and acquisitions do not appear to have acquired ideal significance. A number of aspects, such as management variations, interaction complications, deficiency of understanding of local market, legal challenges etc, make limitations in development via mergers in European level apart from the fact that this plan was shown appropriate in nationwide stage.

Deregulation :

The unification of the European financial market due to the appearance of Economic and Monetary Union (EMU) has modified the financial regulation in the taking part nations. After the abolition of the controlling limitations, credit organizations such as financial institutions, mutual funds, insurance providers etc., have moved from their conventional part and via mergers, acquisitions, consolidations, combined projects or alliances, have gradually performed a bigger part in their industry. Institutional and technical improvements have restricted the access limitations in the financial industry. The development of institutional traders assisted their access to the public benefits and increased the part of capital marketplaces.

Trends Continue…..

Financial Innovations :

Technology has changed the basic economic concepts of banking, has assisted the adjustment of extensive details, has enhanced control and risk management and has permitted quicker performance of dealings and development of eye-catching financial offers. Furthermore it has permitted a more efficient supply of the existing products and services; it has increased the economies of scale in banking processes. Electronic banking and customer services, using modern electronic channels, such as mobile telephone networks, television and wireless appliances, constitute a new way of transaction with the bank. This is a new reality, which is called remote banking; it has enhanced the capabilities and has affected all banking procedures. These days, financial institutions contest with each other in a more clear market where the contemporary economical client, who has easier access to details, has the ability to compare different items according to quality and price.

Growth

Latest Reforms and Development for enhancing Financial sectors

Europe has also been working to improve the stability and efficiency of the Single Market in financial services. This is essential to ensure the financial sector supports the real economy. Key principles include the need for the financial system to be properly supervised, more stable, more responsible, more consumer-friendly and growth-enhancing. Three new European Supervisory Authorities and the European Systemic Risk Board were established in 2011 to improve cross-border cooperation, consistent enforcement of rules and systemic oversight. New rules will also establish a single rule book for all financial firms and markets to apply appropriate regulatory standards and support a level playing field across the Single Market.

Feb 2013 - Strengthened regime on anti-money laundering Apr 2013 - Non-financial reporting for companies May 2013 - Access to basic bank account / transparency of fees / switching of bank accounts June 2013 - Creation of European long-term investment funds July 2013 - Revised rules for innovative payment services (cards, internet & mobile payments) Sep 2013 - Regulation of Financial Benchmarks (such as LIBOR & EURIBOR) Mar 2014 - Long-term financing of the European economy / Revised rules for occupational pension funds

(“IORP”) Apr 2014 - Revision of the Shareholder Rights Directive

Services in Finance Industry

Financial services plays vital role in shaping finance industry outlook in world’s economy. The Financial Services industry is more competitive than ever. Comprehensive financial services and professional consulting are a sharp focus for European finance industry. Deft in financial services and long experience in customer service provides edge to Europe. Broadly we can classify these services into three major service sector i.e. Banking, Insurance & Asset Management.

Asset Management

Insurance

Banking

Asset Management

The term Asset management is most commonly used in the financial world to explain people and companies that manage investment strategies on behalf of others. Asset management is a methodical process of implementing, working, keeping, improving, and losing resources cost-effectively.

Asset management actions include assigning resources and selecting investment strategies, using a variety of financial commitment opportunities in authorized and non-registered funds; improving profits with types or leverage; and creating personalized financial commitment solutions for larger clients, mainly through so-called separate accounts.

Total assets under management (AUM) in Europe increased 11% in 2012 and close to 9% in 2013, to reach an estimated EUR 16.8 trillion at end 2013. This growth was driven by net flows and market movements, on the back of improved financial market conditions and renewed investor confidence. This brought the ratio of AUM to aggregate European GDP to 115% of GDP at end 2013.

European AUM (EUR trillion) and AUM/GDP (percent)

2007 2008 2009 2010 2011 2012 20130

20

40

60

80

100

120

140

024681012141618

102 81 81 104 99 108 115

13.610.9

12.814 13.9

15.416.8

European AUM (in percent) European AUM (Euro trillion)

Asset Management Continue…..

European asset managers held 23% of the securities other than shares issued by euro area residents at the end of 2012, and 31% of the share and other equity issued by euro area residents. The order of magnitude of this estimation confirms the essential economic function played by asset managers in Europe in providing an essential link between investors seeking appropriate savings vehicles and borrowers who need funds to finance their activities and developments. By performing this function asset managers make a significant contribution to the overall development of the real economy.

Europe ranks as the second largest market in the global asset management industry –managing 33% of the EUR 47 trillion global asset management industry at end 2012. The European asset management industry has traditionally held a share of approximately one-third of the global industry.

Central Role of Asset Management in Investing

Asset managers offer a key service to their customers desiring to increase the return on their prosperity. The flow chart reveals the transmitting procedure by which resources circulation from customers to the market. Benefits are resources which houses do not eat from their earnings. For institutional customers such as insurance providers and retirement benefits resources, this contains the repeated efforts these organizations get from their members. These savings or earnings sources are added to family prosperity or the supplies of institutional traders.

By combining savings from a large group of traders, asset managers offer a number of benefits to their customers.

Saving

Wealth

Asset Managemen

t

Risk - Adjusted Returns

Asset Management Continue…..

Flow of Fund in Asset Management Industry

The primary features of asset management companies in Europe is to channel funds from those that have stored to those that have a lack of funds. Those who have stored and are lending funds, the lender-savers, are on the left, and those who must lend funds to finance their spending, the borrower-spenders, are on the right. Debtors can lend funds directly from creditors in financial markets by promoting financial instruments, such as certificates of deposit, commercial paper, corporate bonds, government securities and stocks. This path is often known as direct finance, in contrast to the second path, which includes a financial broker that appears between the lender-savers and the borrower-spenders. The real difference between this path and that of direct finance is that the lender-savers do not know who the greatest loan provider of their funds is, whereas in the direct finance path, the lender-saver knows to which client their resources are being routed to.

BanksInsurance companies & Pension funds

Financial Markets

Lenders - Savers• Business Firms• Governments• Households• Foreigners

Borrower – Spenders• Business Firms• Governments• Households• Foreigners

Investment Banks & Brokerage Firms

Asset Management Companies

Asset Management Continue…..

Flow of Fund in Asset Management Industry continue…..

The major financial intermediaries fall into three wide categories: banks and other deposit-taking institutions, life insurance companies and pension funds, and asset management companies. These three groups offer specialist services in the economy. Typically, banks are financial intermediaries that accept deposits from individuals and institutions and make loans.Insurance companies and pension funds take in savings from households and company employees, and invest them in money market and capital market instruments and other assets. Asset management companies provide an efficient way of pooling funds for investment purposes.

Asset management organizations offer their agent function not only to houses, business companies and government authorities, but also to the other groups of financial intermediaries, in particular pension funds and insurance policy agencies. For this reason, amongst others, they have a separate position. As organizations making investment decisions choices for investors who have chosen to have their assets professionally managed, Asset management organizations are the most important type of buy-side institutions. The buy-side is the opposite of sell-side organizations, such as investment banks which are specialized in helping firms issue securities and acquiring other companies through mergers and acquisitions, and brokerage firms, which conduct transactions on financial markets for clients or for their own account.

Asset managers are creating a the real economy, assisting organizations, financial institutions and government divisions to meet their short-term financing needs and long-term investment specifications. They achieve this by offering equity capital in both primary (IPOs and private placements) and secondary markets, and secondary markets, as well as credit capital – directly via corporate bonds or indirectly via money markets. By contributing to very high phases of activity and turnover in the secondary markets, they also promote the determination of the price of the securities showing all appropriate details. If asset managers were not contributing to the supply of funds in financial markets, companies would lend in less favorable conditions. This would lead to higher cost of capital, lower levels of investment and poorer long term growth performance.

Last but not least, voting at investor conferences is a way for asset managers to play a role in enhancing business governance of issuers, and in assisting to build investor value while safeguarding the managers’ portfolio investment. Indeed, by voting, asset managers pay attention to the quality and suitability of the details provided by providers and, eventually, may observe in the medium-term their actions. So, voting has become a part of the liability taken on by asset managers to signify specifically the best interests of savers and investors

Asset Management Continue…..

Asset Management Continue…..

AUM in Investment Funds and Discretionary Mandates

Discretionary mandate assets at end 2013 are estimated at EUR 8.7 trillion or 52% of AUM, whereas investment funds accounted for the remaining EUR 8.1 trillion or 48%. Typically, asset managers receive mandates from institutional clients and high-net-worth individuals, whereas investment funds serve both retail and institutional clients’ investment needs.

52%48%

Discretionary MandatesInvestment Funds

EUR 7,415 bn

2007 2008 2009 2010 2011 20120

1000

2000

3000

4000

5000

6000

7000

8000

9000

6987

5396

62896993

6587

7415

6642 5521 6466 7042 7275 8021

Investment FundsDiscretionary Mandates

Discretionary Mandates Vs Investment

Funds (end 2012)

Evolution of Investment Funds andDiscretionary Mandates AUM (EUR billion)

EUR 8,021 bn

Insurance

Insurance is the equitable transfer of the risk of a loss, from one enterprise to another in return for payment. It is a form of risk management primarily used to hedge  against the risk of a contingent, uncertain loss.

Insurance enables households and organizations to live and perform in a stable environment. It not only helps economic transactions by providing risk return and indemnification, it can also enhance financial stability, mobilize benefits, enable risks to be handled more effectively, motivate reduction minimization and enhance efficient capital allowance.

With a share of 33% of the global market, the European insurance industry is the largest in the world, followed by North America (30%) and Asia (29%). Insurers’ investments in the European economy continued to grow during 2013. Concerns remain, however, about how the Solvency II directive will affect their ability to continue as Europe’s largest long-term stable investors, according to Insurance Europe. As of 31 December 2013, the European insurance industry had over €8.5 trillion of assets under management, representing a 3.2% growth at constant exchange rates compared with 2012

Life Insurance

The European life insurance industry continued to operate in a difficult macroeconomic environment in 2012. A significant proportion of Europe’s customers found it increasingly challenging to commit part of their income to long-term investment strategies, with short-term main concerns such as day-to-day expenses or repaying debt generally taking priority. Consumers also seemed to have a greater preference for liquidity in their products, partly due to a lack of confidence in financial markets. Demand for life insurance was further affected in a number of countries by factors such as a reduction in the tax incentives for life insurance investment strategies and competition with other (more liquid) benefits items. Despite this challenging environment, European insurance providers ongoing to play their important social role of providing long-term financial stability and security for policyholders’ benefits.

Life insurance providers engaged in premium and with-profit advantages items with described advantages, which invest the huge of their funds in fixed-income equipment, find it progressively difficult in such an environment to offer eye-catching assured financial commitment profits to customers. These items therefore become less attractive when interest levels are low. The likely rebalancing of risk-sharing in new agreements between customers and insurance providers, with customers required to take more of the threat, also makes the agreements less attractive

Insurance Continue…..

Non-Life Insurance

The non-life insurance policy industry, with its three main business lines — motor, health and property — displays a significant relationship with the economic circumstances and durations in each individual market. Higher levels of general economic activity typically result in higher levels of demand for protection products. Need for general insurance policy is also price-sensitive because of the limited degree of product differentiation inherent in the non-life industry.

Non-life insurance policy showed 41% of total written premiums in European countries in 2012. Premiums continued to increase in comparison to past years, despite the challenging economic environment. Non life business benefits from the fact that, even during periods of economic uncertainty, people still buy insurance to protect the things that matter to them, such as their health,their houses or their vehicles. This is also one of the key reasons why insurance providers play such a stabilizing part in the economic system.

For non-life business, motor (except third party liability), credit and certainty deliver seem to be the most insecure business lines, with premiums decreasing in more than half of the nations surveyed. In the latter, the decline is more than 5% in almost 50% of the nations. Fire and damage and common responsibility seem much more effective, with growth in more than 70% of the nations. Accident and health is also growing in a large number of countries as personal accident is often sold in addition to property insurance.

Insurance Continue…..

Benefits and claims paid

Total benefits and claims paid by insurers to their customers amounted to €948bn in 2012, a 1.4% increase year-on-year. This was primarily due to the increase in life insurance benefits paid in Europe: up 3% in 2012, to €647bn, following a more significant increase of 11% in 2011. The UK, France, Germany, and Italy continue to account for three quarters of European life benefits paid. Total benefits and claims paid in non-life insurance remained largely stable in 2012, amounting to €302bn, with higher property claims balanced out by lower motor claims. A look back at the last few years shows that the total claims and benefits paid have constantly increased since 2010 after a significant drop in 2009. This is a reversion to the trend of constant increase that prevailed before the crisis.

Total European benefits and claims paid — 2003–2012 (€bn)

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

200

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1400

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1800

380 390 410 500 580 580 500 520 590 610

600 610 660

780

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900 920

Non-Life Insurance

Life Insurance

Insurance Continue…..

European Insurance investment portfolio

European insurers’ investment portfolio —

2003–2012 (€m)

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

1000

2000

3000

4000

5000

6000

7000

8000

9000

52005800

64006900

7200

65006900

7300 7400

8300

Banking

Retail banks offer a range of services to individual clients and businesses, rather than to huge companies and other financial institutions. The services can include current accounts, investment advice and broking, and loans and mortgages.. Retail banks perform two crucial functions for customers: firstly, they enable clients to bank their cash securely, access it easily, and conduct transactions; and secondly, they provide access more cash to fund huge purchases, such as buying a home. In return for holding customers’ funds, which they can then invest, financial institutions pay clients interest.

The state of the financial system in European countries is not a satisfied one. The international economical trouble global financial crisis of 2007- 2009 has turned into the European sovereign debt crises of 2010-2012. While a strong financial sector can support financial growth, a poor industry increases an financial problems. The Western economic industry had a strong year, 2012. Long-term pattern continued its course: total number of Credit Institutions (CI) in the EU decreased by 199, of which the biggest change was recorded in Italy (-40 CI), followed by Germany (-29), Spain, France and the Netherlands (-21 CI each). These changes reflect banks’ effort to consolidate. The only countries where the change was positive, are: Lithuania (2), Malta (2) and Sweden (1).

European banks have put significant effort into entering the life insurance business during the past few decades and they have had significant success. The BAI/BCG study estimates that leading European bancassurers typically generate a return on revenue and on capital of 20 % to 30 % and derive one-quarter to one-third of their retail profits from insurance policy and investment revenue . Moreover, European banks have penetrated the life insurance business to a significant degree: their share of the markets averages more than 20 %, and exceeds 50 % in France. Finally, European banks’ revenue of life and pension insurance continue to grow at more than 20 % per year, substantially more rapidly than overall revenue in their local markets.

Banking Continue…..

EUROPEAN RETAIL BANKING REVENUES €BN, 2011 – 2012

BREAKDOWN AT COUNTRY LEVEL

2011 2012

10%8%

15%14%

15%14%

22%

22%

18%

18%

2%2%

5%6%

10% 13%

4% 4%

Spain

Italy

France

Germany

UK

Sweden

Turkey

Russia

Switzer-land

BREAKDOWN AT SEGMENT LEVEL

2011 2012

19%20%

81% 80%Individuals

SMEs

365

377365

BREAKDOWN AT PRODUCT LEVEL

2011 2012

5% 3%4% 4%6% 5%

4%3%

8%5%

19%18%

14%16%

3%5%

7% 7%

15% 17%

15% 16%

Mortgages

Personal loans

Credit cards

Overdrafts

Small Business assets

Current accounts

Savings

Small Business liablities

Bancassurance

Retail In-vestments

ALM Revenues

The above represents the single largest segment of the European banking market as a whole – over 50% of overall aggregate banking revenues across the countries analysed.

365377

377

The performance of 100 key European banks representing more than 90% of the EU 27 banking industry.

Specialized Financial Services

Corporate and Investment Banking

Insurance and Investor Services

59%

23%

13%

5%

700

Germany France

Source: Annual reports, Financial presentations, Roland Berger analysis

UK, Ireland

Iberia ROW2

Switzerland, Austria

Nordics BeNeLuxCEE1

Regions of activity

1. Central& Eastern Europe.

2. Rest of World

Retail & Business Banking

Italy

Banking revenues from core activities [2013; EUR Bn]

Banking Continue…..

Banking Continue…...

As a result of bank closure, some 5.5 thousand branches were closed. The countries concerned are mainly Germany, Spain and Italy, where 1.6 thousand, 2 thousand and 1 thousand branches closed, respectively. In track with that, the number of employees employed in the banking industry dropped by over 51 thousand or 1.7%, not least on the account of Spain (over 11.7 thousand), Italy (over 6.8 thousand), France (5.4 thousand), Germany (4.7 thousand), Poland (4.3 thousand) and Romania (4 thousand). By comparison, Sweden saw the biggest rise secured employees depend, by 2.4 thousand. The turbulence also had an impact on banks’ financial figures in 2012. Assets shrank by 1.9% or EUR 863 billion. Total stock of loans in the EU fell by EUR 206 billion (0.8% of total stock of loans), while stock of deposits increased by EUR 177 billion. These figures are a tangible manifestation of the impact of financial regulation, which eventually leads to deleveraging and restructuring of the banking sector.

Number of CI(thsd)'12

Number of CI(thsd)'11

Staff (mio)'12

Staff (mio)'11

Assets (EUR trln)'12

Assets (EURtrln)'11

Loans (EURtrln)'12

Loans (EUR trln)'11

Deposits (EUR trln)'12

Deposits (EURtrln)'11

0 5 10 15 20 25 30 35 40 45 50

Euro area Non euro area EU EFTA

Total assets, loans, deposits, number of credit institutions and number of staff employed in 2011 and 2012

Banking Continue…...

Total stock of deposits in the EU increased by 0.5% in 2012, however, development is only because of the non-euro place EU nations (by EUR 232 billion or 4.7% for the region), while euro area banks’ inventory deposits declined by EUR 115 billion, or 0.7%.

Analysis of the EU banks’ significant counter parties reveals that the greatest decline in banks’ deposit base took place within the inter-bank deposits: they decreased by EUR 283 billion, or 2.2%. The only other counterparty whose deposit base shrank was central governments: a fall of EUR 16.5 billion, or 7.2% in 2012.

On stability, EU deposits from non-monetary financial organizations grew by a steady 2.2%, of which deposits from corporates increased by a healthy 5.1% (or by EUR 108 billion). 2007 2008 2009 2010 2011 2012

0

5

10

15

20

25

30

1.2 1.1 1.1 1.3 1.9 2.14.7 4.3 4.7 4.8 5 5.2

15.3 16.8 16.5 16.517.3 17.2

Euro area Non euro area EUEFTA

Total deposits

Challenges and opportunities

Challenges

European financial institutions will face a significant investment crisis in 2014  through the combined impact of Basel III capital ratio requirements, Leverage Ratio requirements, the European Central Bank Comprehensive Assessment, and possible further national regulatory discretions. As economies rebuild, banks should switch from asset contraction to expanding their capital base.  Although the environment for capital raising is becoming more favourable, we estimate €180 billion is required, which is a substantial amount for the market to absorb in the short term, so the competition for new capital will be fierce.

Cash generation for stronger European banks will stay strong, particularly with weak loan growth. This means stronger financial organizations will start to look for growth opportunities again. For some this will lead to asset sales or dealings between recuperating and retrieved banking organizations. Acquisitions are likely to stay within areas e.g. European countries and Central and eastern Europe, as the regulatory environment is driving regionalised strategies.

Non-bank or specialist lenders will continue to rise, but still have a long way to go before they challenge the mainstream lenders. At some point, a number will sell out to their larger bank rivals, providing them with an expanded product offering (e.g. a capital light, non-insured peer to peer product).

European Regulation of OTC Derivatives and Short Selling On 15 September 2010 the European Commission adopted two proposals — one for a regulation to bring greater transparency to the OTC derivatives markets and a second for a regulation on short selling and certain aspects of Credit Default Swaps (CDSs). Negotiations on both proposals are under way in Council and Parliament. Once adopted, the regulations would applied from year-end 2012.

Challenges and opportunities Continue….

As the Eurozone and UK recover from the recent economic turmoil, successful insurers will be those that simplify their organizations and business models to create more efficient operations that can seize emerging growth opportunities.

Insurers must keep pace with evolving regulations, which are becoming more stringent, affecting everything from capital requirements, to commission rates and customer care.

While the region’s aging population and the personal and commercial non-life markets present significant opportunities to increase sales, insurers must maintain focus on profitability.

As the low interest rate environment continues, insurers must retool their investment strategies to increase investment yields and be adequately compensated for increased risks added to the portfolio.

As the economy improves, insurers must develop a stronger digital presence, investing in technologies that address the enhanced service expectations of consumers purchasing insurance on the internet.

The development of a comprehensive, cross-functional enterprise data analytics strategy will improve customer targeting, product design, pricing, agency management, underwriting, claims and reporting

Opportunities

Recommendations

There are several things that European finance sector need to do for their success:

Get accustomed to the new, reregulated world in which they are operating; Get a real grip on risk management; Use their capital more effectively; Innovate across multiple dimensions (easily said but very difficult to do); Keep finding ways of enhancing the customer experience. Developing Europe’s securities markets and non-traditional sources of finance; Encouraging and enabling a greater, more direct, role for long-term investors; Encouraging the investment banking ‘sell-side’ to do more to stimulate and underwrite long-

term investment; Enabling market-based credit intermediation to play a more prominent and stable role in

financing; and Reviving and developing securitisation.

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