European banks reach the tipping point

Today marks the launch of zeb’s 2018 European Banking Study (EBS). Now in its 6^th year, the study provides a comprehensive analysis of the strategic challenges facing the 50 largest banking groups across Europe.

The key themes emerging from this year’s report are that too many European banks are operating in unstable market conditions fuelled by unsustainable profit taking, crisis level valuations and dwindling market share. While profitability has improved over the last two years, this has been driven by reduced loan losses and litigation costs, hence it is highly unlikely banks will be able to repeat these gains in the coming years. Nonetheless, the eight Nordic banks included in the study emerge as some of Europe’s strongest performers with better capitalisation and higher profitability than their peers. Of the eight banks in the sample achieving returns in excess of their cost of equity, 6 were from the Nordics. However even these lenders are not immune to strategic threats. Banks are haemorrhaging market share to other financial intermediaries – including shadow banks and non-banks – who now hold almost half of the assets in the European financial sector, moving from 22% in 2008 to 48% in 2017.

Against this backdrop and more than a decade on from the banking crisis, banks urgently need to switch from “recovery mode” to “action mode”. The question is, what specific action or actions should they take? How can they best navigate the road ahead?

The study outlines four strategic options for traditional banks:

pursue increasing M&A activities
focus on product specialisation
break up the value chain
move beyond traditional banking models

Banks can also combine these different options to create a multi-layered strategic approach. Pursuing any one of these strategic options means following one or more of the emerging industry development trajectories: increased market consolidation, the rise of product specialists, a shift in the direction of “banking-as-a-service” and the advent of financial ecosystems.

To learn more please contact the Stockholm office directly.

Steffen Jung