Roland Berger: Profitability of EU banks still too low

03 November 2014

The profitability of European banks has over the past year grown strongly, by approximately€54 billion. Nevertheless, profitability remains too low, in particular in comparison with American counterparts, according to a new research from consulting firm Roland Berger Strategy Consultants. If banks want to boost their profitability, then further reducing their cost levels, more focus on innovation and growth strategies for emerging markets will prove instrumental.

Last year the revenue of the European banking industry stablised at roughly €700 billion*. In comparison, in 2011 (and 2009) the market was valued at €717 billion. Approximately 60% of the revenue is realised in the retail banking segment, while nearly a quarter of the turnover is earned in the investment banking and corporate segment.

Banking Reveues from Core Activities

Profitability has, compared to a dramatic 2012, recovered strongly. In 2012 European banks realised a combined profit of €9 billion, last year the number has grown to €62 billion, two billion more than in 2011.

Profit Before Tax Variation

Despite the improved bottom line results, the industry still struggles with its profitability, say the strategy consultants, in particular when compared to the performance of their American counterparts. The Return on Equity (ROE) – an important baseline for industry profitability – of European banks for example ails at around 1,5%, while U.S. banks on average can rely on 9%. Also on other KPI’s European banks trail their American counterparts.

European vs US Banks

Change of strategy
If European banks want to close the gap with their US rivals, then they should in the eyes of the consultants turn their attention to sustainable profitability. “It is time for a change of strategy,” says Roland Berger, recommending three key pillars. Firstly, continued attention is needed on cost control, through a simplification of the service portfolio and product assortment, pointing at similar successful strategies in for instance the FMCG and automotive sectors. In addition, such changes boost the flexibility of the organisation, the quality of services and the competitive position via a vis competitors.

The second focus area for banking executives is innovation. Easier said than done, in addition to best practice innovation management it requires a change in mentality: banks should change from ‘followers’ into ‘leaders’. Lastly the growth potential of emerging markets should be capitalised, for example through market entry or on-the-ground partnerships.

If executives of European banks mange to successfully deploy the above recommendations, then they can according to the strategy consulting firm more than double their profitability by 2016, to between 9% and 11%. The move will have substantial benefits on market capitalisation – shareholders are forecasted to reward banks with a 30% higher market value.  

Evolution of ROE of European Banks

* In the research report ‘The State of the European Banking Industry’ Roland Berger assesses the performance of the top-100 European banks, representing roughly ~90% of the banking industry in the EU 27 countries.

** Based on the comparison of the top 20 European vs. top 10 U.S. banks (market capitalisation).


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