Firstly, further price improvements on deposits will be hard to achieve without introducing negative interest rates for the broader mass market. Secondly, the flattened yield curve will reduce revenues from term transformation in coming years. Thirdly, if deposit growth continues to outstrip loan growth then the loan-to-deposit ratio will fall under 1.00, making it more difficult to invest surplus balances into attractive assets. And fourthly, the trend towards fix-rate lending in combination with a deposit structure favouring instant access increases the inherent interest rate risk in the banking book.
The industry is dealing with a “perfect storm”, challenging all dimensions of the bank revenue and operating model. Standing still is not an option.
We recommend that European banks act now and consider six actions to manager their individual situations. We suggest to focus first on the following tactical levers – with short term pay-back:
- Evaluate product re-pricing opportunities Banks would have to revisit how they correctly price the value they bring to their clients by exploiting customer’s additional data, different price sensitivities and see how to deal with higher transparency
- Review their asset-liability management (ALM) framework to identify whether their model sophistication meets market standards
- Adjust their cost base by using technology to introduce more automated end‑to‑end processes
In addition we see the opportunity for retail banks to focus on strategic levers:
- Revisit sales process/customer journey, by moving up in the customer value chain so that the bank can be when and where the client need arises (e.g. customers buy houses not mortgages, so the mortgage process can be entirely integrated into the house purchase process)
- Access new revenue streams with online premium/aggregator platforms or premium data storage offerings
- Exploit growth options in international expansion to diversify the portfolio