Analysis of data from 156 banks across Europe reveals that declining assets, falling income and unyielding costs are pushing the sector to a tipping point
Zurich, June 9, 2015 - European banks have responded to stricter regulations – most notably Basel III – by disposing of assets and shrinking their balance sheets, BearingPoint Institute analysis of bank data between 2009 and 2013 reveals. But balance sheet and risk-weighted asset (RWA) shrinkage has not been accompanied by falling costs at a similar pace, leaving many banks with dwindling profits. Since 2011, banks of all sizes around Europe have reduced total assets by about 11.2%, a higher rate than overall RWAs. This means that over the past two years, banks, especially large and small banks, have begun to hold a higher percentage of RWAs, which is counter-productive and highlights the urgent need for a strategic change.
The general picture is a smaller asset base, which restricts opportunities to generate revenues and fight off competitive threats from rivals, including captive banks and digital-first players. A number of corporates have set up banks to offer finance to their customers, including many car manufacturers such as VW, BMW, Mercedes and Toyota, and some others, like high-technology company Trumpf. But earnings are only half the story. Becoming lean should be driving up profitability, but according to the BearingPoint study, the operating costs-to-RWAs ratio is rising.
The authors of the study, Frank Hofele and Robert Bosch, both Partners at BearingPoint, attribute a large part of the higher operating costs to RWAs ratio to staff expenses, which have not fallen in relation to the reduction in assets. Between 2010 and 2013, large banks decreased staff costs by 5.2%, medium-sized banks by 2%, and small banks by 1.6%. Rising general and administrative expenses are amplifying the problem. For medium-sized banks, they rose 9.5% between 2010 and 2013 and for large banks, they rose 5% over that time period, only small banks experienced an unchanged level for general and administrative expenses.
Looking at cost-to-income ratio (CIR), a useful indicator of banks efforts to create return relative to income, BearingPoint Institute research found that average operating costs have been stagnant, falling just 0.01%. This puts pressure on banks’ CIR. One reason for this is because disposal of loan portfolios can be done relatively quickly, but reducing associated costs takes longer. When CIR is viewed in relation to total assets, small banks stood at 56.5%, medium-sized banks at 50.7% and large banks at 57.3% in 2013. Not being able to reduce the CIR-to-assets ratio to below 50% indicates that banks are not capable of covering costs with current income.
There is still a short window of opportunity to turn the situation around. Banks need to commit to greater automation, create more interdepartmental cooperation, reduce operating costs and modernize their business models.
Frank Hofele, Partner at BearingPoint
Bank management teams must move away from being too heavily focused on compliance challenges and make it an urgent priority to develop new sources of profitability.
Robert Bosch, Partner at BearingPoint
Based on data from the Banker Database, a service of the Financial Times, BearingPoint conducted an analysis of financial information of 156 banks, comprising assets, risk-weighted assets (RWAs), interest income, net fees and commissions, operating costs, general and administrative costs, staff costs, Tier 1 Capital ratio and cost-to-income ratio between 2009 and 2013. The banks were divided into three groups, sorted by total asset as of 2013, offering a more detailed view on specific attributes for each bank.
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