European Banking Study 2020
The global COVID-19 pandemic and its impacts on the real economy raise extensive challenges for Europe’s banks. While many banks were substantially more resilient and more stable when the COVID-19 pandemic broke out than when they entered the global financial crisis in 2008 and have been able to considerably improve their capital ratios and, thus, their financial resilience in recent years, figures for the first quarter of 2020 already reveal increasing profitability problems. For example, at an average of 2.5%, the estimated post-tax return on equity (RoE) of the 50 largest European banks is significantly below the previous quarter (7.4%) and also below the cost of equity of around 8.0%. Given the impending impact of the COVID-19 pandemic on credit portfolios, these figures are expected to further deteriorate in the course of 2020.
As the experts of the strategy and management consultancy zeb, focused on the European financial services industry, additionally report in their current European Banking Study 2020 (EBS), credit risks resurge throughout Europe. This is true, in particular, for corporate loans and, still to a lesser degree, for (residential) property lending. The study based on the 50 largest European banks finds significant differences between banks with regard to the volume and, especially, the structure of credit portfolios. As a result, the impact of the pandemic is expected to vary widely among Europe’s banks because of focuses on different industries in corporate loan portfolios, special regional setups and individual portfolio qualities. Using two scenarios, zeb’s expert team calculated significantly higher loan loss provisions (LLPs) in corporate and retail business in Europe for the next 18 to 24 months. In case of a severe recession, LLPs may even increase by a total of 500% against the year 2019.
Dr. Dirk Holländer, Senior Partner at zeb and co-author of the European Banking Study 2020, emphasizes: “COVID-19 has considerable impacts on credit risks for many of the largest European banks. Rather than being the cause of the crisis, banks now are an integral part of the solution. Banks, governments and regulators have realized that. They are currently preparing to tackle upcoming challenges together.”
The analyses of the European Banking Study show that Europe’s banks will not be able to cope with the impending deep recession on their own. Thus, it is imperative to put banks in a position to adequately fulfill their role in addressing the economic crisis a synchronized interplay of monetary and fiscal policy as well as regulation so that they become an integral part of the solution. The current “breathing room” regarding capital ratios is particularly important since RWA inflation can be expected in the short term due to an increase in lending and the pro-cyclicality of the regulatory calculation methodology.
Of course, banks need to take action themselves, too. The examples given by zeb’s experts include, depending on the business model, improved credit risk management, a vigorous agenda for intensified digital transformation – be it in the field of automation and standardization or customer communication and interaction – as well as a continuation of the steady improvement of profits and costs in the European banking industry that has been on the agenda for years.
Overall, the zeb study team anticipates that the aftershock of the COVID-19 pandemic will create a number of daunting operational and management challenges for Europe’s banking and financial sector. Nevertheless, the authors believe that the pandemic also represents a major opportunity for Europe’s banks. As members of the “economic rescue team”, banks can strengthen their role in the real economy and further expand society’s trust. Even now, we are already experiencing a revival of the local and core banking principle that replaces short-term transaction-oriented banking. Such changes might well be in tune with the growing trend towards corporate and environmental sustainability which will reemerge when the pandemic recedes. COVID-19 might, thus, be a catalyst in this respect as well. More than ten years after the global financial crisis, the role of the banks working side by side with their customers is likely to be boosted in a fundamentally changed social context.
Dr. Ekkehardt Bauer, Senior Manager at zeb.research and co-author of the study, explains: “Since the beginning of the COVID-19 pandemic, we have seen a new quality in bank-customer relationships. Above all, this could benefit the classic local banking principle and already existing long-term customer relationships. These changes reflect a growing trend towards corporate and environmental sustainability that will surge again when the pandemic abates and may well become permanently established.”
Further information on the current European Banking Study is accessible here.
As a leading strategy and management consultancy, zeb has been offering transformation expertise along the entire value chain in the financial services sector in Europe since 1992. In Germany, we operate offices in Frankfurt, Berlin, Hamburg, Munich and Münster (HQ). Our international locations are in Amsterdam, Copenhagen, Kiev, London, Luxembourg, Milan, Moscow, New York City, Oslo, Stockholm, Vienna, Warsaw and Zurich. Our clients include European large-cap and private banks, regional banks, insurers as well as all kinds of financial intermediaries. Several times already, our company has been classed and acknowledged as “best consultancy” for the financial sector in industry rankings.
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