Retail banks in both western and eastern Europe continue to face profitability challenges, as revenues and margins are predicted to remain under pressure in the near term.

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Despite implementing significant cost reduction programmes over the past five to 10 years, including reducing branch networks and employee numbers, European banks’ cost-to-income ratios (CIRs) have remained largely unchanged, according to Kearney’s 2021 European Retail Banking Radar (RBR), now in its 12th year.

The global consultancy firm maintains its 2020 prediction that European banks would need to reduce costs by €35bn-45bn over the next three to five years to meet their profitability targets.

The Covid-19 pandemic has certainly taken its toll on the region’s banks. Over the course of 2020, the profit per customer declined by 30% to €147, driven by a near doubling of risk provisions. As a result, one in 10 banks reported losses, and 70% of banks generated profit per customer of under €100, compared with 40% of banks doing so in the previous year. But the effect has been less severe than Kearney forecasted a year ago.

The 2021 RBR tracks 89 retail banks in 22 European markets, comprised of 51 banks in western Europe and 38 banks in eastern Europe. Nineteen of the 22 countries analysed reported an income decrease compared to 2019 levels. UK banks reported the highest decline of 10%, followed by Portugal, Benelux and the Czech Republic with a 5-7% drop.

Over the past five years, banks have taken action to reduce operational costs. On average, headcount has been reduced by 9% and branch networks by 19%

In the medium term, cost reduction remains the primary lever for banks to increase profitability. Over the past five years, banks have taken action to reduce operational costs. On average, headcount has been reduced by 9% and branch networks by 19%. The top 20% of European banks have reduced their employees by 16% and branches by 26%, with a corresponding CIR improvement from 65% to 60%. However, the bottom 20% of banks have seen their CIR increase to 68% from 53% – “a significant underperformance”, according to the report.

In response, Kearney advises retail banks to focus on core strengths and cost structure to secure future growth, reimagine and transform the operating model, address future skills and capability mix and forensically examine their cost base.

In addition to the headline numbers around profitability challenges, the RBR explores the main industry trends that European retail banks are grappling with in 2021, according to Simon Kent, global head of financial services at Kearney. The first theme that cuts across the industry is the digital response to Covid. “The level of acceleration that we’ve seen in consumer attitudes, as well as working practices, poses the question: how can organisations maintain this new metabolic rate of change?” says Simon Kent, global head of financial services at Kearney.

Second is the people proposition. “New working practices, such as working from home, as well as talent being much more global and national rather than local and regional. Boards are facing a real challenge over the next two to three years in terms of stepping up their recruitment, training and upskilling staff, embracing agile, and finding a new cadence that works for their people,” he says.

Third is purpose, which also ties into the people proposition. “Today’s talent is not only looking for interesting and remunerative roles, but they’re also looking to work for an organisation that has a clearly articulated purpose, for example where it stands on important issues such as environmental, social and governance,” says Mr Kent. He expects a massive wave of activity over the next three years around the purpose agenda.

The fourth area is consolidation, another space which should see a lot of activity in the next two to three years. “There’s clearly parts of the market that just don’t work. There are a small number of specialist players who are performing extremely well, with a high return on equity. But we expect to see a lot of consolidation among the mid-sized players, who can’t scale and are suffering from costs. We also expect consolidation at the very small end of the scale – the new entrants such as fintechs and challengers – as the larger players look to acquire either talent or functionality,” he says.

Another theme the report identifies is trust, which Mr Kent argues is a new measure that financial services organisations should put at the forefront of how they think about their businesses. “We’ve gone through the customer service and net promoter score [trend], but trust is the new measure,” he says. “During Covid, we’ve seen customer trust rising for those incumbent organisations who have demonstrated an ability to support customers through those challenging times.”

Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight

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