The vast majority of European banks need a fully efficient product portfolio to improve cost income-ratios
Few European banks exceed or even meet their earnings and cost reduction targets. As BearingPoint's Banking KPI Study 2021: Europe's banks are on the road to recovery revealed that out of more than 100 benchmarked European banks, only a small proportion managed to sustain a strong cost income-ratio of less than 55%. The majority were laggards, with cost-income ratios greater than 55%.
The top banks had one thing in common: efficiency. And it starts with an efficient product portfolio.
Figure 1: Cost-income ratios of European banks. Source: Banking KPI Study 2021 Europe's banks are on the road to recovery
BearingPoint's in-depth analysis revealed that an efficient product portfolio is vital for a healthy cost-income ratio. Only a small share of products is responsible for a large percentage of revenues. Complex products often do not contribute that much other than high costs.
Learning organizations with smart people management and people transformation are crucial success factors that banks often neglect during efficiency transformations. BearingPoint has analyzed many efficiency initiatives and found that the best performing banks not only simplified their product portfolio and used more automation, but they also put a greater focus on people management and people transformation. Successful banks have also invested more in IT, as the following figure shows:
Product portfolios are often too large, complex and hinder efficient operations. To avoid expensive and extensive transformations, a new approach to banking efficiency must be scalable, agile, and low risk and still deliver excellent return rates.
The first step for an efficiency transformation is a business model assessment, where banks focus on their strategic positioning and the delivery model and product portfolio. Following the analysis, banks can classify their products into core and non-core products, where core products are responsible for the lion's share of overall revenues.
Products classified as core products will undoubtedly be part of the target product portfolio. With the start smart approach, banks immediately focus on core product continuation. That would include automating manual tasks, eliminating unnecessary and redundant tasks, and increasing client autonomy through self-services, to name a few. Banks will realize immediate efficiency gains through the optimization of product processes and IT architecture.
Going further, banks need to analyze non-core products to determine if they become a part of the target product portfolio or if they discontinue them. The scale smart approach considers revenues, costs, and potential revenue increases and reduced costs. The processes and corresponding IT architecture of continued products are optimized. Banks also need a discontinuation strategy that incorporates the possibilities of outsourcing, decommissioning, carve-outs, and close-outs.
During the efficiency transformation, banks incorporate people transformation into three pillars: train – enable – adapt. For BearingPoint, this has proven to be a crucial success factor for sustainable and successful efficiency transformation. We give high priority to employees' involvement and commitment during an efficiency transformation to initiate change management and foster adoption at an early stage.
An efficient product portfolio significantly improves a bank's cost-income ratio and frees up investment budgets needed for the transformation process. In our view, banks should pursue the NEW banking approach (sustainability, efficiency, growth) as part of the transformation process in order to achieve sustainable profitability.
Creating the basis for a genuine growth strategy requires courage and decisive action. In this respect, we believe there is currently still enormous untapped potential. It is crucial to
There are many positive figures from the banking sector. After a challenging year in 2020, the profitability of European banks rose significantly in the second Corona-impacted year. However, the banks had no respite: geopolitical developments kept them alert. Competitive pressures have also continued unabated, and new regulatory ESG requirements must be taken into account and implemented and scaled cost-effectively.
The new survey asked consumers how important sustainability is to them with regards to financial investments. While interest in sustainability in financial investments is increasing among the younger generation, security and return on investment remain the decisive aspects for older consumers.
The market and transformation pressure on Europe's banks continues unabated and competition among them is high. Despite the COVID19 crisis and Brexit, the banks with the best cost-income ratio are those that manage ESG risks better and integrate them into their operations, while at the same time investing heavily in their IT infrastructure.
This white paper provides detailed central clearing statistics, highlights reasons for and against central clearing, and discusses why voluntary or direct central clearing could generate efficiency gains.