Many of the world’s leading banks are boxed into a corner. Margins are under pressure from prolonged low and negative interest rates while increased regulation means holding more capital and less freedom to make autonomous credit decisions. This last point will become even more relevant if the Basel Committee on Banking Supervision’s aim to standardise models for calculating risk-weighted assets becomes a reality.
This leaves only two levers for banks to pull – revenues and costs. We can talk all day about the revenue upside from a new generation of consumers empowered by the latest fintech platforms adopted by the big banks in partnership with trendy start-ups. But at best this is only likely to deliver the revenues that a new generation of consumers should anyway, as they replace the revenues of retiring or dying generations.
It may not even do that much as new generations often cannot afford to get on the property ladder at all and regard saving as a poor substitute for the instant gratification of spending. In other words, they are poor material for banks.
This all leads in only one direction – if the major banks of western Europe and the US are ever going to get back to delivering to their shareholders a decent return it has to come through a major take out in costs. And we are not talking 5% to 10%, but 30% to 40%.
At present the top 50 world banks have cost-to-income ratios ranging from 26% to 107%, according to thebankerdatabase.com. But the top 12 banks in the ranking are all Chinese, where the high income keeps the cost side of the ratio in check. The best performing European bank is Santander at 42%. The worst performing banks are Credit Suisse at 92%, Deutsche Bank at 98% and Royal Bank of Scotland at 107%.
For many of the banks at the wrong end of the table there is little in the way of revenue upside that could ever fix the problem. Instead the focus has to be on cost and as the consultants are always saying – this is a matter of rethinking the business model and coming up with a whole new paradigm rather than taking out a layer of management here and axing a branch there. The hard work on this has hardly begun.
Brian Caplen is the editor of The Banker.
