European Banking Study 2021 first edition

The year 2020 and the COVID-19 pandemic have left their mark on Europe’s banks. Nevertheless, the banking sector as a whole has proved to be rather stable. As zeb shows in the current edition of its European Banking Study 2021, the picture for many institutions is divided: On the one hand, the profits of the 50 largest banks fell by more than half overall and average post-tax return on equity, already the core problem for many banks in recent years, declined further from 6.4% in 2019 to around 3% in 2020. On the other hand, the capitalization of banks remains solid on average and many institutions were able to increase their equity position and thus improve the corresponding capital ratios once again.

The main reason for the decline in profits was a significant increase in loan loss provisions: it reached the highest level measured over the last seven years. Unlike during the financial crisis, however, 80% of the banks considered were able to cover the loan loss provisions from their operating profits. Only ten of the major European institutions, mainly from the regions very badly affected by COVID-19, posted losses.

Over the next few months, the focus for banks will be on managing the wider economic impact of the COVID-19 pandemic. The next challenge, however, is just around the corner: ESG (environment, social, governance), the new megatrend of the 21st century.

Focus of ESG discussions is often on regulation and risk measurement

For many market participants in Europe, and especially in the European banking sector, the “E” in ESG, that is the environmental and climate aspect, is in focus. Risks associated with climate change in particular are gaining importance in the political and social debate. Regulators and political authorities are pushing banks to meet ESG-related requirements.

The study identifies three key areas for regulatory initiatives in the European banking sector – but with varying degrees of concretization: (non-financial) reporting & disclosure, stress tests & risk management, and capital requirements. Especially with regard to the first two areas, there are already extensive initiatives and planned requirements. There is currently a heated debate about possible additional capital relief or even surcharges for banks’ “green” or “brown” lending which would lead to a change in the capital ratios. In a first outside-in analysis, the study shows that fundamental changes in the capital ratio can only be expected if very high supporting/penalizing factors are applied. At the individual contract level, however, there is certainly a massive impact on banks’ new business.

Nevertheless, the European Banking Study makes it clear that there is currently little information on banks’ actual climate risks. On the whole, the results among the largest European banks are very heterogeneous and mainly driven by the individual share of a bank in those industrial sectors and countries that are strongly affected by climate change related risks. For example, the Nordic countries, and in particular the real estate and manufacturing sectors, are comparatively more strongly affected by transition risks, i.e. the need to reduce greenhouse gases. In Southern Europe, banks face relatively higher physical risks, e.g. from extreme weather events and their impact on the agricultural sector.

Overall, however, the study finds that many important questions related to ESG are still unanswered. Even established rating agencies currently come to very different conclusions in their assessment of the ESG profiles of banks and companies, or provide only limited data. The development of reliable rating systems for their own – e.g. also medium-sized – business will therefore be a key challenge.

ESG – a unique opportunity for banks

A different, entrepreneurial perspective on the ESG challenge, however, reveals significant potential opportunities for banks. If a reduction of greenhouse gases by approx. 55% is to be achieved by 2030, huge climate-relevant investments are required across all economic sectors. The EU Commission assumes a direct financing volume of EUR 1,000 billion per annum in Europe alone – as a conservative estimate. For banks, this could mean additional earnings of almost EUR 27 billion per year, or EUR 270 billion by 2030, according to zeb estimates.

The study also shows that most market participants understand ESG products as offerings for so-called “dark green business”, i.e. activities that are green in themselves, such as wind turbines, etc. However, this area is relatively tiny.

“The consequence,” explained study author and ESG expert at zeb, Dr. Axel Hesse, “is fierce competition for attractive offers in spite of rather low margins. Much more worthwhile, however, is the transition business, i.e. supporting companies on their way to a significantly lower carbon footprint or an improved ESG profile. Although this segment accounts for a large part of the overall market, it has so far been neglected by many banks. Transition business is the key area for an earnings-focused ESG business and therefore also the most important area for banks.”

Dr. Dirk Holländer, study author and Senior Partner at zeb, added: “ESG has the potential to be both a huge complexity driver and a unique opportunity. The question is how banks address the risks and seize the opportunities. Banks that make an early, bold move towards ESG by implementing effective risk management tools, establishing scoring expertise and measurement methods, and helping clients transform with advisory, financing, and investment solutions will gain a competitive advantage over other institutions.”

More details on the European Banking Study 2021 are here available.

About zeb

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, 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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