More profit pain in store for Europe’s Banks

More profit pain in store for Europe’s Banks

European Banks remain trapped in a downward profitability spiral, with no obvious solution on the horizon, according to a KPMG report, The Profitability of EU Banks, Hard Work or a Lost Cause?

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Key findings from the report include: 

  • Moving from Basel 2 to ‘Basel 4’ could add almost 0.5 percent to the overall cost of banks’ funding 
  • Net interest margins across European banks average 1.2 percent compared to around 3 percent in the US and 2 percent in Canada 
  • Cost to income ratios have remained stubbornly high in European banks since 2008, averaging in excess of 60 percent
  • Non-performing loans are a considerable drag on performance, having increased to an average of 5 percent from 1.5 percent in 2006/07
  • The average return on equity is 3 percent while cost of capital is in the region of 10 12 percent

Across Europe non performing loans (NPL) have increased sharply since 2008 and remain a key challenge to profitability. Whilst efforts are being made to manage NPL, the €1.2 trillion overhang could take decades to off load. Banks need to take decisive action, even if this results in a short term impact on profits. 

Forthcoming regulations ‘Basel 4’ and MREL (minimum requirement for funds and eligible liabilities) will make it even more difficult for banks to deliver higher levels of profitability. Whilst these regulations will bring greater resilience to Europe’s banks, they will also increase the cost of funding. KPMG’s report finds that implementing what has commonly become known as Basel 4, looks set to add almost 0.5 percent to the overall cost of European bank funding.

Marcus Evans, Partner, at KPMG’s European Central Bank Office says:

“It’s clear that across Europe banks are still grappling with the new world of low, or negative, interest rates and mounting capital and regulatory costs. The old 3:6:3 maxim that a bank manager could borrow at 3 percent, lend at 6 percent and go home at 3pm certainly no longer holds true. 

“The successful banks will restructure their balance sheets to minimise the impact of new regulations and reduce their cost to income ratios through smart use of technology. Whilst technology investment absorbs much desired profit in the short-term, streamlining back office processes and moving to digital distribution channels is essential futureproofing and will ensure long-term savings. Reversing the profitability of European banks is not a lost cause but it will certainly be a lot of hard work.”

To read the full report press here

Ends

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