Banks need to respond to rapidly changing customer preferences, digital interfaces and platform businesses to thrive post-crisis

Oct 4, 2017

LONDON, October 4, 2017 – While the performance of European banks has recovered from the lows of 2008, their average return on capital of 4.4% remains well below the minimum expected rate of return, according to new report, Beyond Restructuring: The New Agenda - European Banking 2017, by global management consultancy Oliver Wyman.

The report charts the progress European banks have made in responding to the commercial and regulatory consequences of the crisis in the last decade; noting that there are large geographic differences. Banks in some EU markets have completed this restructuring process, whilst other markets continue to struggle.

Whatever their progress on the restructuring agenda, all of Europe’s banks now find themselves having to deal with a rapidly changing environment. New customer preferences, digital interfaces and platform businesses are changing how customers bank – a trend that will be accelerated by regulators’ push for open banking. At the same time, automation and data tools are creating the opportunity and imperative to significantly cut cost bases.

Lindsey Naylor, partner at Oliver Wyman and lead author of the report, says: “Europe’s banks have spent the last nine years working hard to recover from the financial crisis, repairing their balance sheets, making the changes demanded by new regulations and exiting structurally unprofitable businesses, all in a low growth context. There is a strong possibility that Europe’s banks will emerge from the crisis only to see a whole new set of challenges that may require changes to the banking business model itself. The new agenda will demand innovative answers beyond the restructuring that has taken place so far”.

The report’s highlights include:

  • Banks have been forced to increase capital and shrink balance sheets, resulting in average capital ratios increasing from 3.7 to 5.8 percent (Tier 1 capital/ (IFRS) assets). Further work is now in train on MiFID II, Brexit, and recovery and resolution planning.
  • Good progress has been made on exiting unprofitable businesses, both from a business line and a geographic perspective, as banks have moved away from non-core markets. Oliver Wyman estimates that in wholesale banking, European banks have exited lines of business that generated annual revenue of €10 BN in 2009.
  • Waves of cost savings programmes have been announced to increase operational efficiency, but nevertheless nominal bank expenditure grew at 1% per year 2008 to 2016 and Cost/Income ratios barely moved, as revenues shrank in the same timeframe due to low interest rate environment and squeezed margins.
  • While some European markets have been transformed by a consolidation wave, others have barely moved in this period. Greece and Spain have seen concentration double since the crisis and Italy has seen significant activity over the past year. Cross-border consolidation remains limited.

About Oliver Wyman

Oliver Wyman is a global leader in management consulting. With offices in 50+ cities across nearly 30 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm has more than 4,500 professionals around the world who help clients optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of Marsh & McLennan Companies [NYSE: MMC]. For more information, visit www.oliverwyman.com. Follow Oliver Wyman on Twitter @OliverWyman.

The report is available here. Key exhibits from the 2017 report include:

  • Average capital, IFRS assets and capital ratio for EU banks
  • Wholesale markets business line exits for EU banks since 2009
  • Market concentration in the EU banking system
  • Country-by-country status of post-crisis restructuring
  • Evolution of # of branches, employees and FTEs
  • Total bank costs and cost/income ratio for EU banks