European Banking Outlook 2021

After having withstood one of the steepest drops in gross domestic product ever experienced, up to €160 billion – equivalent to 25 per cent of European banking revenues – are on the table as the industry readies itself to help solve a new set of challenges brought on by the pandemic.

This is according to “Ready To Lead: How Banks Can Drive the European Recovery,” a new European banking report by Oliver Wyman, the global management consultancy.

The banking system is in a robust position to play a central role in driving Europe’s economic recovery with strong capital ratios, in large part due to lower than expected provisions and dividend freezes. The industry’s average core tier-1 equity (CET1) ratio stands at 15.4 per cent, increasing from 14.4 per cent in 2019. Less than 1 per cent of total industry capital sits in banks with CET1 ratios below 12 per cent.

The consensus in the industry last year was that single-year credit losses would be approximately €200 billion across European Banking Authority-reporting institutions. In the end, last year’s figures came in at €110 billion, still more than double that of 2019. Since then 30 per cent of the banks that report on a quarterly basis have released provisions, on average 12 per cent each, with more to follow.

But tougher tests are still to come, with asset bubbles inflating, caused by excessive market liquidity, low interest rates and a speculative frenzy in digital assets, and the specter of inflation returning. Countries with the most stringent lockdowns and heavily exposed economies have seen revenues drop by up to 11 per cent, while risk-weighted assets fell nearly 5 per cent.

The report outlines five challenges that Europe needs its banks to address to help the economy get back on track:  1. Unwinding emergency lending programs; 2. Adapting to the Capital Market Union and European Union’s Next Generation fund; 3. Financing the carbon transition; 4. Delivering payments, lending, and other banking products in a digitised economy; and 5. Building tomorrow’s financial infrastructure, including potential Central Bank Digital Currencies.

Matthew Austen, Managing Partner, Europe Financial Services, Oliver Wyman, says: “Europe’s banks have a once-in-a-generation opportunity to support the recovery from the pandemic and help tackle some of the big issues facing Europe’s economy. With the equivalent of as much as a quarter of banking revenues at stake as we emerge from the pandemic, the banking system needs to engage with policymakers, anchor their central position in the economy, and reinforce customer trust. If they don’t, European banks will face the consequences of falling short of societal, political and shareholder expectations.”

David Gillespie, UK & Ireland Head, Oliver Wyman, adds: “The impact of the crisis on bank financials has varied significantly by country. The UK economy was among the most heavily impacted by COVID and parts of the economy are still in shock from Brexit, with labour shortages and changed trading rules. The UK’s banks nevertheless are in a strong position financially to continue to help the economy respond to the many challenges that no doubt lie ahead.  The coming period will require them not only to provide further support for consumers and businesses, but also deliver on their environment, social and governance goals in the lead up to COP26.”

About the analysis

Oliver Wyman’s European Banking Report uses proprietary models to estimate future bank economics, taking into consideration retail and corporate default rates, provisions, risk weighted assets, earnings and other key banking metrics. Overall figures are shown at the European level, as well as providing granularity on bank earnings and balance sheets impacts on 17 European countries – Austria, Belgium, Denmark, Finland, France, Germany, Greece, Netherlands, Norway, Ireland, Italy, Poland, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

About Oliver Wyman

Oliver Wyman is a global leader in management consulting. With offices in 60 cities across 29 countries, Oliver Wyman combines deep industry knowledge with specialized expertise in strategy, operations, risk management, and organization transformation. The firm has more than 5,000 professionals around the world who work with clients to optimize their business, improve their operations and risk profile, and accelerate their organizational performance to seize the most attractive opportunities. Oliver Wyman is a business of Marsh McLennan [NYSE: MMC]. For more information, visit www.oliverwyman.com. Follow Oliver Wyman on Twitter @OliverWyman.