European banks hit rough waters in 2016 as interest bites

01 August 2017

Banks across the EU have seen their income per customer fall by 2.6% on average. Profitability per customer meanwhile tumbled by around 5% (excluding Italian banks), as the low interest rate environment continues to negatively affect banks, while cost controls, from branch closures to digitalisation, are barely making up the declines.

New research from A.T. Kearney, titled ‘The Tide of Changes Shifts All Banks’, explores wider changes in the banking system across key European states, as well as the wider background in which the firms have been operating. The global financial system has slowly recovered to reach pre-crisis rates almost 10 years later, following an era of uncertainty in the wake of the 2008 crisis. In Europe too, the slow period of growth in the wake of the crisis has given way to stronger average performances across the various EU states as consumption has increased amid increasing investment.

The global financial crisis saw considerable shifts in overall growth across the European Union on average. Investment fell more than 5% during 2008 before returning briefly to growth between 2010 and 2011. By 2012 however, government were again driving through austerity measures, with consequent drops in investment.

Economic growth in EU

In recent years investment has ticked up, however it remains relatively low compared to pre-crisis years, and net exports growth has turned slightly negative, suggesting there is still some way to go before economists can state a full recovery has been staged. Consumption has increased steadily however, and has returned to pre-crisis levels in a sustained manner. GDP growth, overall, has stabilised at a little over 2% across the EU, however it is worth noting particularly in the UK that wages have continued to stagnate – something that initially caused the credit crunch of 2007, the forebear to the global economic crisis as employees ramped up borrowing to supplement their insufficient wages. In 2014, it was revealed as many as 22% of employees were failing to earn the living wage (not to be confused with the mild improvement of the new minimum wage, which goes by the same name, but is still lower than the living wage).

This suggests that while GDP has stabilised, borrowing at unsustainable rates remain an unavoidable fact of life for many workers. The current monetary policy across the EU meanwhile of excessively low interest rates for a protracted period of time means this borrowing has begun to impact on the profit-making capabilities of most banks across the Eurozone. The decline in net interest income has been slightly offset by a tick up in deposits, up at a rate of 3.3% per annum since 2014, and a slight increase in client loans to businesses, up by 2.6% in the same period, however this borrowing has also been fuelled largely by low interest rates, meaning banks are limited in how much they can benefit from this. There is still clearly a potential for further crisis in this case.

Total income changes

Retail banks have in the past years see operating expenses increase; while, profit over the four years between 2012 and 2015 increased, costs related to risk provision to bolster the banks against financial market risks, decreased. The most recent result showed a small decline in profit before tax in 2016, while risk provision costs and other non-operative expenses increased by 2 points and 1 point respectively.

Possible decline

The drop in profitability was partly the result of declines in net interest income as well as declines in fee income. The firm notes however, that there has been considerable regional variability in terms of cost and revenue changes. Most regions have invested heavily in the reduction of costs, from reductions in personnel, to branch closures and increased focus on digital channel migration. The cost-to-income ratio has not, however, moved significantly, even given the effort. A lack of adaptation to the low-interest business environment, with past business models focused heavily on interest rate income, noted as a primary causes for the poor profitability outcomes across the region.

Retail banking radar

The research notes that 2016 was a tough year for regional banks profitability. Aside from the cost-to-income ratio increasing to 64%, profit per customer across the region fell to around 150, from 190 the year previous net interest rate income relative to total income remained flat at around 70%, while income per customer fell to further to around 630. Income per employee remained relatively robust however, at around 230,000.

In terms of income per customer, the biggest drop was noted in Spain and Italy, at 8.6% and 6.6% respectively, while on average falling 2.6% across the region. Switzerland and Turkey were the regions to see slight growth in their respective income per customer levels. Profitability per customer was down relatively significantly, however, this was largely the result of massive decrease at Italian banks as they scrambled to get their operations into compliance; excluding Italian banks, profitability was down a more modest 5%.

Change of market performance bubbles

The spread of revenue performance was relatively broad in relation to the market position of institutions in 2014. Around 29% of all banks surveyed managed to move from below average to above average performances between 2014 and 2016, the largest segment however (33%), saw their market dominance in 2014 turn into an underperformance in the most recent two years. Around 18% of banks, were unable to turn around their market underperformance in 2014, and have continued to underperform. Around 18% of respondent banks have managed to keep their market overperformance from 2014 into the most recent period.


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