The analysis included 89 retail banks in 22 countries, of which 51 banks in Western Europe and 38 in Eastern Europe.
Unprecedented government intervention provided support to retail banks and alleviated the blow. Nonetheless, the report shows that the profit per customer declined by 30%, driven by a near doubling of risk provisions. As a result, one in ten banks reported losses, and 70% of banks generated profit per customer of under EUR100, compared with 40% of banks doing so in the previous year.
In Romania, banks’ profit per customer was 16% lower in 2020 compared with 2019.
At the same time, banks in 19 of the 22 countries analyzed reported a decline in income compared with 2019, with banks in the UK reporting the biggest decline, of 10%. For Romanian banks, the average decline in income was 4.5%.
A trend that is specific to Romanian banks is the lowering of fee and commission income base, which reached 29% of total income in 2020 from 30.5% the previous year. This suggests convergence to developed European markets where interest income is dominant. The Romanian banking system is also starting to face competition from the fintechs and neobanks, which operate in a streamlined environment free of the pressures of traditional banking, Kearney analysts noted.
Banks have taken action on costs over the past five years. On average, headcount has been reduced by 9% and branch network by 19%, but for a number of banks, this hasn’t been enough.
In terms of operating cost improvement, the top 20%of European banks have reduced their employees by 16% and branches by 26%, and seen their cost-to-income ratio improve from 65% to 60%.
However, the bottom 20% of banks have seen their cost-to-income ratio increase to 68% from 53% percent, a significant underperformance.
Operating costs for Romanian banks have not deteriorated considerably and their cost-to-income ratio increased by just 0.3 percentage points, to 60%. This was due to a 4.5% drop in income balanced by a 3.9% reduction of operating costs.
“We predict that European banks will return to pre-COVID performance within three to five years, but increasing profitability will require cost reductions of EUR35-45 billion during this time. The trajectory of European retail banking has certainly changed, but as we adapt to the ‘new normal’, European economies will recover, and banks will have the opportunity to become the engine of the recovery. Unlike with the financial crisis, retail banks have regained clients’ trust by providing financial support through successive lockdowns. As such, we anticipate that the European banking sector will be in the position to drive recovery and emerge stronger and better in the wake of COVID-19, ”said Simon Kent, Partner and Global Head of Financial Services at Kearney.