Europe’s banks experience first outcomes of their transformation programs
November 2022
The European banking market is on the upswing, and the transformation programs for greater efficiency are having an impact. In addition, successes in adapting business models to reduce dependence on the interest business are becoming increasingly visible.
The CIR is at its lowest level since 2013, RoE is showing a significant increase to pre-crisis levels after a low point in the Corona year, and EBT has also more than doubled.
The drivers of the development with regard to costs are a sharp decline in risk provisioning, as the feared wave of insolvencies failed to materialize, while at the same time, digitalization and transformation programs are showing success, even if administrative costs are again rising marginally due to the return of events and travel, for example. In terms of income, there has been a substantial increase in commission income and trading income due to higher fees, for instance, in payment transactions, account management and securities trading.
A comparison of performers and laggards (performers with a CIR <55%) shows that the business area is not the key success factor for a bank but rather an efficient value chain with a clear focus. This is particularly evident from the fact that performers continue to invest substantially more in their IT.
The success of the ongoing transformations is also reflected by the gradually decreasing efforts banks need to make to become performers (CIR <55%). Whereas only 1/4 of banks were performers in 2020, 1/3 of all banks will be performers in 2021.
A detailed analysis of business models shows that specialty banks operate more efficiently on average – an advantage that will be further extended over the years by streamlining structures and implementing tailored solutions for administration and IT. At the same time, however, they are more susceptible to crises and thus recorded a bigger slump in their RoE in 2020. The majority of specialist banks have total assets of less than €150 billion. In retail banking, in particular, the size of the banks and their scaling play a key role (size matters in retail banking). The top 5 banks in this business area have a significantly lower CIR than peer banks in the same size category (total assets > €500 billion).
The trend toward greater sustainability will also continue uninterrupted in 2021. The main drivers are physical and transitory risks, increasing regulatory requirements and changing customer needs. Against this background, a reclassification of banks can be observed in 2020. While most banks were rated in the medium range in terms of their sustainability risks, in 2021, they are split between low and high-risk banks.
A correlation between CIR and ESG scores can be observed. Banks with a low ESG score also tend to have a lower CIR. This is because banks that have already completed their transformation have created room to maneuver in which they can focus on sustainability and are enabled by their efficient architectures to bring sustainable products to market more quickly. The challenges in the ESG context continue to be the implementation of regulatory requirements combined with high reputational risk and the establishment of efficient impact management, including ESG data and processes. In Germany, banks with a sustainability focus are also becoming increasingly important (+6.0% p.a. growth in customer deposits since 2016).
In summary:
Developments in 2021 show that European banks have succeeded in growing their profitability. In addition to increasing net fee and commission income, product portfolio optimization also played a key role from the point of view of profitability and efficiency.
Successful banks are reducing the number of product variants and focusing on high-profit components. In addition, the banking industry’s role in the overall economic value chain is proving to be innovative and progressive. The industry is increasingly focusing on initiatives that achieve holistic effects and not just optimize individual processes or relationships.
Business model innovations are increasingly necessary to counter the fundamental structural change in the industry and make it possible to exploit the growth potential of embedded finance, digital assets and ESG at an early stage. It follows from this that there are standard levers for banks to improve sustainability, efficiency and growth further, regardless of their business model or focus.
Therefore, in our view, we advise banks to pursue this NEW approach to ensure that the transformation process to sustainably profitable banking is successful.
About the study
This year’s banking study is based on an analysis of the 2013 to 2021 financial statements of 122 European banks supervised by the ECB or national supervisors. The data set covers over 70 percent of the aggregated total assets of all monetary financial institutions in the European Union. In addition to the annual financial statements, the segment reports of 64 banks were analyzed.
The study is available for download here. Read the study, see our detailed analysis, and go through our recommendations for action.
We hope you enjoy reading it!
