Analysis from global consultancy partnership Kearney has found that retail banks will need to reduce costs by €35-€45 billion (£25-£32 billion) within the next 3 to 5 years to regain profitability.
To do so will require the transformation of operating models to improve the cost-to-income ratio (CIR).
Now in its 12th year, Kearney’s European Retail Banking Radar is an annual analysis of the pan-European banking market, tracking 92 retail banks in 22 European markets, comprised of 50 banks in Western Europe and 42 banks in Eastern Europe. This year’s instalment looks at how retail banks have fared against the disruptions caused by COVID-19 and looks forward to how the sector’s recovery may be shaped.
The report emphasises that, despite making leaps in productivity through reducing the number of staff and store fronts to generate more business, banks have not made significant improvements in CIR in the last 12 years. Findings have revealed that over the last decade, headcounts have reduced by more than 12%, the number of branches by nearly a third, and the average income per employee has increased by a fifth to €257,000. Despite this, cost-to-income ratios have only risen by 1% to 63% since 2008.
There are, however, regional variations across Europe, with retail banks in Scandinavia having the lowest CIR thanks to robust revenue growth and muted cost rises. In Western and Southern Europe, focuses on cost reductions have been less successful, with revenue generation becoming increasingly difficult in countries such as the UK.
Another barrier to profitability has been the rising technology and salary costs across the European banking sector. Kearney’s analysis found that wages and salaries in the financial services sector have risen by 16% since 2015, and an 80% increase in IT costs since 2015 as banks’ retail divisions continue to invest in technology led solutions.
Simon Kent, Partner and Global Head of Financial Services at Kearney, comments:
“To achieve profitability targets, retail banks must be radical and bold in their thinking; applying yesterday’s logic to today’s problems will hold them back. The main challenge from cost optimisation efforts to date is that any financial gain from a declining headcount has been offset by a changing employee mix and wage inflation.
To improve profitability and retain a competitive edge, banks must transition to become even more digital and data-led, with technology at the forefront of all operations. This means scrutinising their cost base to identify what needs to be done, compared to the nice to haves and taking decisive action.
Banking leaders must also be unflinching in their efforts to reshape their businesses if profits and CIRs are to improve. In doing so, underperforming businesses must be exited in favour of areas that add genuine value. It’s undeniable that such transformation is challenging, but so is today’s business environment.”