Following the global financial crisis, banks in Europe found themselves in considerable strife. In the years that followed, a range of regulations were developed to reduce systematic risks in the financial sector, as well as limit systematic financial crimes. While the banking industry is considerably stronger today than the years following the crisis, a new report by EY reveals widespread gloom within the industry.
In EY's newly released report, titled ‘European Banking Barometer – 2016’, the professional services firm considers changes to dynamics within Europe’s banking system. The report is based on a survey of 250 banks across a range of institutional types, operating in 12 markets: Austria, Belgium, France, Germany, Ireland, Italy, the Netherlands, the Nordics, Poland, Spain, Switzerland and the UK.
According to the report, respondents, on average, are less upbeat about the financial performance changes over the coming 12 months compared to last year. Last year, 48% expected their bank’s performance to strengthen slightly, this year it had dropped to 44%. The number of respondents that expect their bank’s performance to weaken slightly has increased from 15% last year to 21% this year. Those that expect performance to weaken significantly were up 1% from last year, to 2%. The report further finds that, overall optimism has slipped to its lowest level in four years, when the Eurozone debt crisis was at its height.
Marie-Laure Delarue, EY’s EMEIA Banking & Capital Markets Leader, says: “Low economic growth within Europe and the economic slowdown in some of Europe’s key trading partners, combined with a difficult geo-political situation across the Middle East, South America and parts of Africa leave bankers with few reasons to be cheerful. Opportunities for growth are few and far between and local regulatory pressures remain high and are evolving.”
The research also considers changes in banks’ projected return on equity over the coming 12 months for a range of countries. The biggest increase is projected for Ireland, where a massive boost in revenues (6.28%) coupled with a marginal increase in costs (0.14%), sees ROE up 2.80%. The UK follows, with a projected 2.66% increase in ROE on the back of 1.69% revenue growth and -1.25% cost cuts. ROE growth expectations for UK banks have fallen by 1% over the last year, from 3.75% to 2.66%. Spanish bankers are also expecting strong results, with ROE up 2.56% on the back of a 0.83% increase in revenues and a significant -4.56% fall in costs.
The survey also finds that a number of countries are expecting to see declines in ROE. Poland in particular is expecting to see declines of -3.33% in ROE, on the back of increased costs and regulatory changes. The Nordics and Germany too are expected to see declines of -0.61 and -0.17% respectively.
Europe as a whole is expected to see a modest increase of 1.06% in ROE from total combined revenue growth of 1.62% and a cost base reduction on -0.90%. However, the consulting firm is less optimistic than the bankers, suggesting that “Unless banks exceed the 1.62% revenue growth and 0.90% reduction in costs they anticipate, we estimate they will only see improvement in average ROE of 0.47% – less than half of the average 1.06% anticipated by the respondents.”
The research identifies risk management as the most important agenda item for 2016, 70% cited it as an issue. The second most important agenda item for the coming year, up from fourth last year, is the streamlining of process and investment in automation and technology. Third on the list is capital, liquidity and the leverage ratio, down from second last year. Compliance with capital market regulation moves up a spot on last year to number four.
The report highlights that attention also continues to turn to FinTech, which has considerable potential to disrupt the financial services market according to recent reports. The area has seen an increase in interest from banks; investing in customer-facing technology is a key priority for 53% of respondents (particularly this year for bankers in Belgium, Germany, Italy and the Nordics), compared with just 43% in 2015, while 23% of respondents expect partnering with FinTech firms to be important for their institution.
Another area of heightened interest is cyber security. Following high profile attacks, as well as structural financial crime, 56% cited it as important this year, up from 48% last year. For UK bankers, cybersecurity remains a major concern, with over 75% placing an increased emphasis on this risk, compared to a European average of 56%.
In terms of growth strategies, a considerable number (85%) of respondents expect there to be some industry consolidation in the next 12 months. The activity is expected to remain relatively small scale, however, involving the disposal or acquisition of companies that are aligned to their core strategy – while selling off overcapacity if it exists.
Beyond industry consolidation, partnerships remain the most popular route to inorganic growth in most markets. Joint Ventures are favoured for those looking to invest in new markets across Europe, although Belgium, Ireland and Spain buck this trend with bankers in those markets expecting to see acquisitions instead.
Delarue adds that: “The challenge for the year ahead for many institutions will be how they protect and grow their market share. Do they stand alone, make strategic acquisitions, or partner with other institutions or innovative firms? Which new markets are both economically and politically stable enough for investment? Can new growth be found in existing markets? These are the questions that will be keeping Europe’s bankers awake at night – it will be interesting to see how they plan to steer the rocky road ahead.”