Constructing a Sustainable Supply-Side

The State of European Retail Banking in 2015

The next 5 years will be a vital period for the European retail banking supply side. Management teams face challenges on multiple fronts. Regulation continues to be a defining feature of the market in a range of areas, from financial resource requirements, to sales protocols, to bank conduct, to payments mechanisms to name but a few.

The underlying economic and interest rate backdrop in many countries remains a difficult one. New forms of competition are emerging – smaller “challenger banks”, growing roles for financial intermediaries, many new non‑bank players. Changes in customer behaviour and technology are demanding fast-paced responses and the re‑invention of both distribution models and processes.

One can easily imagine a very negative scenario for traditional retail banks: overwhelmed by legacy balance sheets and conduct issues, losing out to new competition and more disruptive business models, losing control of the customer interface, struggling under the weight of regulation, and hamstrung by legacy systems and operating models. This may indeed be the fate of some players.

There is also of course a more positive scenario: that retail banks step-up to the plate and use their strengths in brand, customer base and product to lead the evolution of the sector towards better outcomes for customers and shareholders, meeting the immediate challenges resulting from new regulation and the economic position, and the requirement to evolve a much more customer-friendly, more technologically enabled business model.

We see many reasons for banks to be confident they can deliver the more positive outcome. The retail banking sector is, at its heart, reasonably profitable and delivering a solid overall underlying core RoE of 14% in the European market as a whole (after adjusting for the many one-off P&L impacts and regulator fines). Many countries deliver average core underlying RoEs over 15% in retail banking. Customer experiences are improving, aided by the shift to digital channels. In many cases, financial resource management and cost management efforts are bearing fruit. Technology and changing customer behaviour offers a change to develop this position further in ways that can benefit everyone: better services and experiences for customers; lower costs and slicker operating models for the banks themselves.

This report builds on our previous annual publications to provide an updated review of the state of Europe’s largest retail and business banking markets. The report is structured into 4 sections:

  1. European retail and business banking profit pools: a detailed, country level review of profitability and the underlying drivers.
  2. Customer experience: a customer-level view of the experiences delivered by their banks.
  3. Market outlook: a view of the trends impacting the market over the next 5 years.
  4. Management agenda: our views on the challenges and opportunities for bank management teams.

Constructing a Sustainable Supply-Side