KPMG has presented a new study on the impact of regulation, tax and economic challenges on the Belgian banking sector. This is an update of the study conducted in 2013. During an exclusive debate in The Hotel in Brussels, experts and representatives of the banking sector reflected on the study’s conclusions.
Obviously regulation and taxes are very prominent factors and have a big impact on Belgian banks. The study shows this once again. “Banks really need to get their house on order, if they haven’t done so yet”, Geert Ameloot of Argenta remarked. “In my view we need to take a close look at all regulation: is it correct? Is it simple enough? Is it targetting the right things? And is it resulting in what it was aiming for?”
“The future’s not looking very bright at the moment. And what leaps out for me from the study is that regulators and governments are only making our situation worse”, Luc Popelier of KBC added. “We shouldn’t forget that the study shows averages. Behind that, there’s a darker side: there are still profitable banks, that can easily absorb the challenges but there are also institutions where the consequences will be felt much more strongly. So my question is: what will the consequences be for the banking landscape? What do the government and the regulator want?”
Director Tom Dechaene represented the National Bank of Belgium: “I have never seen the banking sector change as much as it has in the last three years. But we all realize that in three year’s time it will look even more different. I know they are facing a tough job, but I’m convinced that it’s still possible to be profitable with a combination of management actions. And when I look at the European statistics about return on equity or cost-income ratio our banks are at the top of the class.”
While the banking sector is not against regulation, it finds itself at a point where the negative impact of regulation is exceeding the benefits. Luc Popelier: “I agree with the ECB and the national regulator that we need to work in a more data-driven way. But there is a tendency that everything becomes very technical and extremely complex, even to that extent that I need more and more time to explain things to my board, even for something as simple as ‘capital’.”
“Regulation has clearly helped our sector after the crisis of 2008. But now the time has come for smarter, more harmonized regulation. For example we insist that Belgium does not gold-plate on European regulation”, Rik Vandenberghe, the chairman of Febelfin, stated. “On the other hand I think new regulation, if implemented fast, can also create opportunities and attract business. This is a field with room for improvement for our government. And it doesn’t cost any money!”
Tom Dechaene: “As a regulator we constantly need to think about our regulation: can we achieve the same in a different, easier or smarter way? But in the end: there’s always going to be more regulation than before. There’s no going back to the situation of 2007.”
The interest rate environment
The KPMG study predicts a deterioration of net interest income by 4.5% to 6.5% year on year. But Luc Popelier is not pessimistic: “Fortunately we have seen an economic recovery. The compression on intrest margins is being compensated by higher volumes. So the sector as a whole should be able to stabilize interest incomes if the economy continues to grow.”
“The low interest rate environment is nothing new, banks have gone through this kind of environment before”, Geert Ameloot remarked. “I think the sector needs to look into the opportunity of repricing credit. But we must make sure we don’t do anything wrong individually. We need proper pricing at the appropriate time.”
Rik Vandenberghe of Febelfin added the banks continue to ask the government to open the debate on the minimum guaranteed interest rate for saving accounts: “We would at least like to get around the table to have an open and objective discussion about this subject. Nothing less, nothing more.”
Regulation and taxes are factors banks cannot control. In order to restore profitability to the desired level of 10% RoE, management actions will be needed, such as cost cutting (with a loss of thousands of jobs), repricing credit, generating new non-interest income or reducing dividends. And on top of all of this, banks also need to invest in their digital transformation.
“There’s a bumpy road ahead, with lots of challenges but still lots of opportunities as well”, Rik Vandenberghe said. “Nevertheless the study clearly shows that measures will have to be taken in order to restore our profitability and guarantee the viability of the banks. As we see in other sectors in transformation, we will need to restructure – also to adapt to the new challenges of digitization. We have no other option.”
Olivier Macq, head of KPMG Financial Services, concluded the session: “We believe the banking sector is at a turning point with lots of changes to come in the operational and business model. Innovation can play an important role. But one of the main factors will be interest rates. This will have an important influence on the way our banks will be able to evolve in the next few years.”