Two substantial crises in the last six years have left the European banking industry in a difficult situation. And even with a view to the future, a fundamental recovery is not foreseeable. On the contrary, two major challenges will strongly affect the banking sector and banks business models in the upcoming years: the continuously low interest rates and the new regulatory requirements. On its own, each issue is a reason for concern for selected market players. But in combination, the two phenomena entail complex and – in many areas – mutually reinforcing implications for the whole banking industry. Dealing and mastering this „double trouble“ will be the major challenge for banks in the upcoming years.
This years edition of zeb’s European Banking Study brings these major topics together. However, only a holistic approach that includes all aspects and combines consequences at relevant level – profit and loss, balance sheet, capital and liquidity – can provide a sufficiently broad overview of the expected impacts on the banking industry. The study presents such holistic simulations and analyses for the top-50 European banking groups (by total assets) and selected business models.
Banking with weakest performance among all industry sectors
Over the last six years, the European banking industry has not only exhibit the weakest performance of all industry clusters, but it has also been the only sector that actually destroyed shareholder value.
On average, European banks have not achieved the cost of equity required by investors as profitability has remained constantly low over the last years and has never reached its pre-crisis levels.
Four countermeasures have been used by European banks in response to the crises: de-leveraging, de-risking, re-capitalization and liquidity increase. These resulted in more sturdy institutions with currently adequate capital ratios, but structural differences among business models (retail, universal and wholesale banking) remain.
Impacts of depressed yields and regulatory changes differ Among business models
Depressed yields and regulatory changes hit banks in several different areas and at different operational levels and lead to many complex or even self-reinforcing consequences for banks and business models. These require a holistic approach that integrates profit and loss, balance sheet, capital and liquidity perspectives.
In the upcoming years, the interest rate environment will depress profitability significantly with regard to all business models without exception.
Especially institutions with business models that currently rely strongly on interest rate or balance sheet-related income – e.g. retail banks or certain wholesale institutions – have to increase the proportion of their other income sources, such as fees and commissions, significantly. In addition, an increased focus on improving operating leverage and efficiency via cost cutting will be necessary.
Regulatory changes will particularly affect universal banks, large internationally active retail banks and certain wholesale players.
Most importantly, even a comprehensive set of drastic and straining measures will not bring European banking’s profitability to anywhere near its pre-crises levels over the upcoming years.
Efficient capital & resource management required
Banks need to react to these challenges with far-reaching operational and strategic changes.
The operational focus is on mitigating the current challenges by analyzing individual impacts, simulating possible scenarios, taking all KPIs/dimensions into account, deciding on appropriate measures and carrying them out systematically. Collaboration among all relevant functions – CEO, CFO, COO, and CRO – will be key in this context.
From a strategic point of view, all institutions need to analyze changes and implications of existing megatrends, to embrace customer requirements and to adapt all front ends, to reduce activities to truly value creating offerings, and to create partnerships with the aim of expanding their service offer and utilizing efficiencies/economies of scale.
Results by business model
Since its first publication in 1998, each edition of the European Banking Study (EBS) has picked up current topics and developments of the European banking sector and has served to back up market expertise with exhaustive data analyses.
This year’s seventh edition of the EBS brings together two of the currently most important challenges for the banking industry: the historically low interest rates and a changing regulatory environment induced by Basel III.