From “Euroboom” to “Eurogloom”: forecasts for European Banks

Four scenarios that should worry Europe’s banks

Dark clouds on the horizon

In deteriorating weather, a wise captain will ensure his ship is well equipped to withstand the approaching storm. Across the region, banks confront a complex combination of rising regulatory pressure and volatile economic headwinds, with no sign yet of clearer market conditions. Making matters worse is a lack of reliable data and analysis about their own “seaworthiness”, as the skies darken and the outlook becomes more obscure. 

Our proprietary, tried-and-tested banking simulation model fills this crucial gap, enabling banks to analyze different short- and medium-term scenarios in a holistic fashion, based on their own internal profile and the potential impact of external forces. 

A model attuned to volatile conditions

For the latest EBS, we used the model to estimate the key performance indicators of each of Europe’s top 50 banks in four different situations: an “everything stays at the current level” baseline scenario; an optimistic “Euroboom” scenario; a scenario in line with consensus market forecasts; and a pessimistic “Eurogloom” scenario.

Our conclusions should give cause for concern in Europe’s banking boardrooms. In the most likely scenario, based on current market expectations, the enduring, sector-wide problem of weak or non-existent profits will not be solved. It will not be viable for banks simply to adopt a passive “wait-and-see” approach, in the hope that profitability returns.

Even in the most upbeat “Euroboom” scenario, the average profitability of Europe’s banks will be only on a par with the cost of equity. This suggests that even in the most optimistic scenario, several major European institutions will fail to meet investors’ expectations.  As for the crisis, “Eurogloom” scenario, banks’ will suffer dramatically decreasing average returns, due to lower yields and higher loan loss provisions (LLPs).

Hoping and waiting for higher yields will not save all banks.

All our scenarios, considered together, send one clear message: a “wait and see approach” cannot be a viable strategy. Even “Euroboom” market conditions – with, say, higher interest rates – will not automatically help all banks to achieve necessary RoE figures or build comfortable capital cushions. They must urgently find ways to reduce their operating costs while growing revenues, or risk finding themselves in an even more perilous position in 2023 than they are in today.

CET1 ratio

Rigorous, detailed research—sobering results

We did not reach these conclusions lightly; our simulation model reflects zeb’s commitment to rigorous, detailed research, drawing on multiple sources, to determine the impact of different factors on regulatory capital, earnings, costs and balance sheet items.  
In the first place, we assembled individual datasets for Europe’s top 50 banks, based on P&L and balance sheet data and segment reporting by banking divisions. Using this data, we simulated the impact on the bank’s P&L and capital position of a range of internal and external factors such as regulatory initiatives and interest rate changes. 

The results of this initial baseline scenario were sobering. Over the next five years, zeb’s model projects that Europe’s top 50 banks will on average suffer a halving of return on equity (RoE), assuming that no additional measures are taken and that interest rates, profit margins and loan loss provisions remain at 31 December 2018 levels.   

Clearly, banks will have to react to changing market conditions. Our three hypothetical future scenarios provide the data and analyses for individual banks to address this crucial issue.

“Our simulations show that banks must substantially adjust their business and operating model. Simply cost cutting and hoping for higher yields is not good enough.”

Dr. Florian Forst, Partner

Integrated simulation of all KPIs instead of isolated calculations


In each scenario, we allowed for specific line item modeling with regard to:

  • Yield curve and interest rate environment
  • Loan and deposit margin sensitivity
  • Funding surcharge
  • Loan loss provisions

To simulate accurately the effects of regulation, low yields and the other factors, we took into account the interactions between the income statement, the balance sheet and regulatory figures. This allowed us to conduct an integrated simulation of each of the banks’ KPIs, rather than produce isolated “silo” calculations.

At the same time, the modeling did not incorporate assumed operational changes arising from cost cutting, balance sheet adjustments or other planned measures. This stricter, fact-based approach enabled us to calculate scenarios that could be used as a reference point for future management actions.

Massive profit gap

Our market expectations scenario indicates that Europe’s top 50 banks need to significantly improve their profitability to cover the longer-term cost of equity. To achieve this target, they will have to increase post-tax profits by a massive 56% over the next five years, or by a cumulative total of EUR 62 bn.

In this turbulent market, zeb’s unique simulation model will continue to provide invaluable data and analyses

Our model demonstrates that in all scenarios, cost cutting alone is unlikely to push average RoE above 9%, the consensus level demanded by investors.

An additional analysis underlines that the expected upcoming profit gap of European banks cannot be closed merely by cutting costs. For example, in the market expectation scenario, total expenses would have to decrease by more than 15% on average for the RoE to cover the cost of equity.

Therefore, banks must also focus on earnings to reach this target.