Business models of the banks ten years behind

The efficiency pressure on Europe’s banks remains high. According to the current bank study by the management consultancy Bearing Point, for which 113 banks from Europe were analyzed and rated, the earnings situation in particular deteriorated throughout the corona pandemic. In addition, the provision of risk provisions at European banks has increased threefold, in Germany even fourfold.

Balance sheet total increases across Europe

According to the analysis, the institutes recorded a significant increase in total assets: in the first half of 2020 they increased by over ten percent to more than 150 billion euros. In France and Germany the growth was 19.3 percent and almost ten percent, respectively. This is due on the one hand to the increase in the credit volume of four to five percent and on the other hand to increased cash and liquidity reserves.

Before the onset of Covid-19, banks often had problems with being sustainably profitable with their business model, but the half-year results of most of them now reveal drastically increased risk provisions. Across Europe, these have increased threefold, in Germany by fourfold. According to the survey, large and medium-sized institutions bear the brunt of the rise in risk provisioning, which is derived from the customer structure and the focus on corporate customers.

Bad loans not yet at 2009 crisis levels

This year’s recession in Europe has increased the risk of unserved loans. For example, the worsening framework conditions caused by the Corona crisis led to a significant downgrading of customer creditworthiness and endangered liquidity in some industries. Rapid measures at national and European level were able to minimize these negative effects. In the further course, however, it can be assumed that the problems in the real economy will exacerbate the profitability and stability of banks considerably.

At the end of the second quarter of 2020, for example, according to the study, 36 of the largest European banks had around 317 billion euros in non-performing loans on their balance sheets. For comparison: During the financial crisis of 2009 this value was 444 billion euros. Current government measures do not yet reveal the full extent of the pandemic in the banks’ numbers. According to the authors of the study, catch-up effects can be expected in the next few quarters.

Frank Hofele, partner at Bearing Point, warns that banks would be well advised to act more consistently and faster in terms of cost efficiency if they want to remain competitive. As an example, he takes a comparison with the automotive industry: “The banks urgently need to streamline their business models and reduce vertical integration. Compared to the car manufacturers with their efficient supply industry, the banks are around a decade behind. One possibility would be to use non-competitive products and processes Outsource service companies that are used by several banks. “

Bad earnings situation in the first half of the year

Although the loan volume rose in almost all regions in the first half of 2020, the earnings situation in the European market fell across the board. In Germany, for example, the interest margin worsened in the first half of the year from 0.87 to 0.79 percent and the commission margin from 0.49 to 0.45 percent. The deteriorated cost-income ratio (CIR) will also have a negative impact on the entire European market in the first half of 2020. According to the analysis, strict saving leads less to a sustainably better CIR than to targeted strategic investments and a focus on the business model. The expansion of digital services and products alone is not enough to generate the necessary increases in earnings and to withstand the pressure of competitors and regulators.

“If the earnings situation does not improve significantly in the coming years, the German banking landscape will have to save around 25 percent of its operating costs in order to achieve an average CIR of 55 percent,” explains Thomas Steiner, Global Head of Banking & Capital Markets at BearingPoint.

This cost-income ratio is a necessary prerequisite for long-term competitiveness. Extrapolated, this means that German banks would have to make sustainable savings of 20 to 25 billion euros in the medium term in order to achieve a competitive cost structure. In order to be able to be successful in this area of ​​tension in the long term, the banks have to focus on three central areas of activity: Efficiency, development of new growth areas and sustainability form, in our view, the core of the future strategic orientation of the banks. This includes, for example, the connection between IoT, banking and sustainable finance, which has become very important as a result of the European Green Deal. “

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