A comparison of the banking markets in Asia, Europe and the USA
March 2022
The banking sector is always in focus in every country. Although banking is one industry among many, banks are the foundation of a functioning state, economy, society. As a result, the public keeps an eye on the performance and strength of its banks.
Digitalization can significantly increase financial performance and strength, a big reason why it has continued to be a megatrend transforming economies and societies in numerous countries for many years now.
The progress made in digital transformation varies considerably in Asia, Europe and the USA. The USA and, in particular, China and Japan in Asia have a head start when it comes to digitalizing the economy and society. More than half of all internet users are in Asia, and China has the largest online marketplace. In addition, Chinese companies often lead the way in digital business models in the B2B sector. Leading providers of digital platforms can also be found in the USA.
Against this backdrop, is digitalization further advanced in the USA and Asia than in Europe, including the banking sector? Digitalization is more than deploying technology. The goal should also be to increase profitability and efficiency by transforming processes and business models. In this respect, the question arises whether European banks are lagging in digitalization regarding profitability and efficiency compared with their Asian and US counterparts.
For our study, we compared the key figures of the 25 largest banks in Asia, Europe and the USA to put them into perspective. Our analysis shows which factors lead to differences in profitability and efficiency and what this means for European banks.
The largest banks in Europe have an average return on equity (ROE) of 4.6 percent. It is more than twice as high in Asia and the USA at 9.8 percent. Asian and US banks also earn significantly more in the interest business than their European counterparts. With a cost-income ratio (CIR) of 53 percent, Asian banks are particularly efficient. While it costs them just over 50 cents to earn one euro, it is more than 65 cents in Europe and the USA.
The delta in profitability originates from three main factors – personnel costs, regulations and business model. If European banks do not act, they will be left further and further behind by their Asian and US counterparts. Yet there is potential for European banks to increase their profitability and efficiency through targeted investments in modern IT architectures, complexity reductions in the business model and mergers and acquisitions.
Consolidation in the European banking market would be another way to increase profitability and efficiency. Europe is “overbanked” compared to Asia regarding economic power and population. And if you look at the USA, the banking market is even more overbanked than the European market. If US banks react more quickly or extensively, European banks could be left even further behind when it comes to profitability and efficiency.
Key findings of our analysis
High personnel costs in Europe depress profitability – banks in Asia have a clear advantage
European banks spend an average of 55 percent and US banks 50 percent of their costs on personnel – Asia’s banks spend significantly less at only 36 percent. On the other hand, if personnel costs were the same in Asia as in Europe, the average CIR in Asia would be around 17 percentage points higher and the ROE around five percentage points lower.
Europe requires high capital backing – regulations in Asia and the USA are less strict
Compared with the USA and Asia, banks in Europe must hold more equity to cover unexpected losses. If banks in Europe had to hold as little equity as Asian institutions, their average CIR would be around six percentage points lower and ROE about three percentage points higher. On the other hand, the markets in the USA and Asia carry a significantly higher risk than those in Europe.
Business models of the banks differ significantly – commission business is critical in the USA
In the USA, commission business plays a much greater role than in Europe and Asia, resulting in a CIR that averages around seven percentage points lower and an ROE about three percentage points higher than European and Asian counterparts.
Opportunities for European banks in digitalization and sustainability
However, personnel costs, regulations and business models cannot fully explain the differences in cost-income ratio and return on equity. Another reason is the greater digitalization of banks in the USA and Asia. The transformation is already further advanced there than in Europe, and as a result, the banks are more efficient and can achieve a higher return on equity with new digital products and business models.
In terms of digitalization, European banks still have massive potential. IT infrastructures are outdated, and the increased use of new technologies can optimize internal processes and significantly improve customer interactions. In addition, digitalization would open up opportunities for new services and business models, as fintechs have demonstrated.
Sustainability will also become a decisive success factor. ESG factors are becoming increasingly important for investors, and a stronger focus on sustainability can become a competitive advantage for European banks. In addition, the banks in Europe can position themselves as partners for the European Commission, which intends to invest billions in climate protection and sustainability as part of the Green Deal.
