BearingPoint Institute reports: only the truly innovative and customer focused banks will thrive
London/Frankfurt, September 25, 2013 – Europe’s banking sector is struggling. A tide of regulation, capital adequacy changes and political interference threatens to sink the sector. While Governments intervene in the key dynamics and profitability of these businesses, the BearingPoint Institute today publishes a detailed report into the heart of the European banking sector and where banks need to look for growth. Publishing the conclusions of seven years of results from 92 banks representing 84% of the consolidated European banking balance sheet, the report makes startling reading.
Commenting on the report, Robert Bosch, Partner at BearingPoint and co-author of the study, said: “Banks are unlikely to ever get back to pre-crisis levels of return. This is more than a temporarily weak situation, or a bad business cycle from which banks can recover by being patient. We are witnessing a sea-change in the banking environment.
Cost-efficiencies cannot boost the bottom line indefinitely. To respond to the structural profitability challenge, banks will have to find new answers by innovating and creating customer value. While other industries have continuously reinvented themselves, the banking sector has dawdled in the innovation slow lane.”
Regulatory constraints will, to some extent, impact innovation ability. But to simply focus on the increasingly tight margins leads only downwards. For banks to break out of this spiral may appear to be a big ask, but so is the scale of the opportunity. The scale of the recent decline of Europe’s banking sector since 2009 has been jaw dropping as they reel from the effects of €7bn of lawsuits against them, 120,000 jobs lost and balance sheet growth hitting a brick wall.
But where to find these new ideas? The BearingPoint Institute has studied the banking sector around Europe to identify best practice, attitudes to risk and developing trends.
In the Nordic banking sector, institutions rely on a ‘vintage banking model’ of retail / merchant oriented banking which may prove to be a double edged sword. While they have remained profitable due to their sound economy and low levels of non-performing loans, their reliance on domestic markets could see them missing out on exposure to faster growing economies.
The German banking system is diverse, with the three-pillar system of private banks, savings banks and co-operatives. While the banks have been generally unprofitable during the financial crisis, they are benefiting from the turnaround in the relatively stable economy. Problems are being stored up in the future in the form of high operating costs across all models, but improvement in branch and staff utilization would make a difference here.
The French banking sector is dominated by a big four – (BNP, SocGen, CreditA and BPCE). While overall less risk-averse compared to the rest of Europe, there is great potential for consolidation and streamlining in terms of branches and staff numbers. The problems on the horizon, however, are wider economic headwinds threatening the whole Eurozone which could hit the sector dramatically, and the fact that structural underperformance is reflected in comparably low price-to-book ratios.
The UK has a large, globally active and diversified banking sector, which has made significant improvements in branch and staff consolidation. The global reach of their business interests has also paid off during the financial crisis. They are not out of the woods yet however, with the credit risk associated with non-performing loans is disproportionate to the Net Interest Margin the UK and Irish banks are earning. In Ireland in particular, short-term thinking has led to risk taking in the domestic credit business.
[BearingPoint Institute Report 003 –Post-financial crisis banking - figure 12: How banks can evolve and innovate] Branch consolidation and diversification offer clear benefits when it comes to assuring stability, but these do not offer a path to growth. The banking industry across Europe needs to switch from a defensive, risk handling mode to a more offensive business development focus, even as continued deleveraging/contraction threaten to shake its foundations. To be profitable in the long run, banking businesses need to come up with substantial innovation with higher returns derived from adding more significant value to customers. New, innovative and higher-value products offer increased margins and therefore a greater opportunity for growth.
Robert Bosch concludes: “Much has been written about the tarnished reputation of bankers across Europe and many would argue that significant change across the sector is no bad thing. In order to truly succeed in the future, half-baked reform and knee-jerk responses will not be enough. Only by completely overhauling the foundations and structure of their businesses to create a standardized platform for faster product development can the banks achieve the efficient business growth that comes from providing innovative products and creating customer value.”
Robert Bosch biography
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