Dublin February, 21 2022: COVID-19 has had a major impact on businesses and industries around the world and the European banking sector is no exception, with Irish banks in particular being hit harder than many of its peers in other markets. A new study of European banks conducted by management and technology consultancy company BearingPoint in which a total of 123 European banks were analysed and evaluated between 2013 and 2020, found that COVID-19 has been central to a structural transformation in the balance sheets of both European and Irish banks.

Business uncertainty and risk averse strategies, as a result of the pandemic, has led to the aggregate balance sheet value of European banks increasing by 10% since 2020 compared to the 1.2% increase in years 2010 to 2019. The research also highlights how Irish banks are standing out from their European counterparts when it comes to the increase in capital set aside for the impairment of loans. 

For Irish banks the amount of provisions set aside for non-performing loans rose year on year by 1,344% compared to 118% for other European banks. As a result of higher capital requirements, greater regulatory requirements and increasing costs, it is no surprise that none of the Irish banks are achieving profitability of any significance at this time.

Overall, compared with their European counterparts, Irish banks are well placed with a moderate level of non-performing assets. However, cost income ratios (CIR) for Irish banks, which averaged 68.7% in 2020, are higher than that of European banks at 64%, both of which are significantly higher than the optimum cost income ratio which should be less than 55%.

Noel Crowley

Irish banks are showing a slump in Return on Equity as a result of the sharp rise in impairment of loans and falling income from interest and commission business. It’s clear from this study that COVID-19 hit Irish banks harder than European peers as both Bank of Ireland and AIB have taken higher provisions. This is partially due to previous experiences with loan impairment due to the financial crisis. We believe banks are now firmly on the road to recovery with business performance and profitability returns set to improve in 2022 as the impact of COVID dissipates.

Noel Crowley, Financial Services Director at BearingPoint

Perhaps unsurprisingly, the study notes that salaries form a smaller portion of Irish banks opex costs than European banks which could be the result of the cap on senior salaries in the Irish banks or perhaps more likely that banking salaries are generally higher in the larger European banking centers such as Frankfurt, Paris and Amsterdam.

As we begin to transition to a post-COVID world, we see banks are cautiously starting to release some loan provisions in order to further strengthen their profitability. There is a need for caution however, as Irish banks can expect to see increasing levels of non-performing assets/impairment charges within future balance sheets of banks as COVID support measures are withdrawn and the cashflow of businesses comes under greater pressure with inflation and potentially increased levels of insolvencies.

Noel Crowley, Financial Services Director at BearingPoint

With European banks on the road to recovery, the BearingPoint Banking Study now calls on banks to focus the business strategy emphasis on continuing to drive more efficiencies through digital technologies while also making a positive impact on the environment. Having a ‘strong sustainability strategy’ will also become increasingly important in 2022 and beyond in order to become a better performing bank with improved ratings.

Based on the report findings, BearingPoint recommends that European and Irish banks adopt the ‘NEW banking approach’ which focuses on sustainability, efficiency and growth. In this difficult market environment, the best cost-income ratio (CIR) is achieved by those banks that have an efficient IT infrastructure, can adapt their product portfolio in an agile manner and claim a good ESG rating.

Environment and social issues are becoming increasingly important issues for banking and the report shows that banks with higher ESG ratings generate higher income and tend to be more profitable than their peers.

Delivering new business efficiencies remains a key task for European banks. The findings suggest that banks that invest more in IT are seeing a faster improvement with much of the cost reduction fuelled by IT investment and digital transformation programmes. Higher performing European banks are spending more on IT and the gap continues to widen between the high performers and the laggards in term of digital transformation.

About BearingPoint

BearingPoint is an independent management and technology consultancy with European roots and a global reach. The company operates in three business units: The first unit covers the advisory business with a clear focus on selected business areas. The second unit provides IP-driven digital assets and managed services beyond SaaS. The third unit is designed to explore innovative business models with clients and partners by driving the financing and development of start-ups and leveraging ecosystems.

BearingPoint’s clients include many of the world’s leading companies and organizations. The firm has a global consulting network with more than 10,000 people and supports clients in over 70 countries, engaging with them to achieve measurable and sustainable success.

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  • Madison Duffy
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