project management information system lecture notes
European Retail Banks Face Challenges to Return to Pre-Crisis Profit Levels
1. Striving Back to Normal?
Retail Banking Radar 2012
Presentation of Results
3 July 2012
M Johannsen, C Merx, A Pratz, O Wittig
2. European Retail Banks: Change Looms in Europe
■ Continued recovery since the 2009 low: Income almost back at pre-crisis levels (2007),
profits still 15 percent below 2007
■ Three markets not in line with this trend: Spain, Portugal, Italy face loss of income and
increasing risk provisions
■ Costs contained, banks shy to make step change in cost base (seen in stable CIR)
■ Nordic banks an exception: focus on digital transformation and on cost management –
visible in better numbers
■ Building resilient models: In light of higher risk levels, capital requirements, client reticence,
more efforts to overhaul delivery and service models expected:
Operational excellence, Complexity management, Pricing realization,
Service innovation, Service excellence, Multi-channel-centric banking
A.T. Kearney xx/mm.yyyy/00000 2
3. Income still below / almost back at 2007 level
European retail banking P&L development
2007=100 @2011=100
100 98 98 100
Total Income 98 96
Operating Expenses 60 60 59 60
61 59
Risk Provisions 9 13
12 13 13
Non-operating Result (1) 3 17
3 2 2
3
-1
Profit before Tax 28 25
22 21 23 24
2007 2008 2009 2010 2011
:
Note: (1) Shown as deducted from Total Income, i.e. negative numbers are actually a positive non-operating result and vice versa
Source: A.T. Kearney Retail Banking Radar A.T. Kearney xx/mm.yyyy/00000 3
4. General top-line environment continues to be challenging
Net interest margin European banks
%
4.5 2011
EIU Forecast
4.0 (last update 25 May 2012)
3.5
3.0
2.5
Eastern Europe
2.0
1.5
1.0 Western Europe
0.5
0.0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: Economist Intelligence Unit (EIU) 2012, partly using OECD Bank Profitability Report A.T. Kearney xx/mm.yyyy/00000 4
5. Recovery since 2009 – still a way to pre-crisis levels
Retail Banking Radar Income per
customer (€)
680
670
Interest income Income per employee
relative to total (€, thousand)
income 60% 200
62%
64% 650
66%
68%
70% 190
18%
16% 63%
14% 150
12% 61%
10% 165
8% 59%
180
Risk provision Cost-to-Income
relative to total 195 ratio
2007
2008
income
210
2009
215
2010
2011 Profit per
customer
Source: A.T. Kearney (€, before tax) A.T. Kearney xx/mm.yyyy/00000 5
6. Wide spread between country markets in all dimensions
Country view 2011
Income/ Income/ Risk Provision/ Total Interest Income/
CIR Profit/Customer
Customer Employee Income Total income
€ Ths. € % € % %
Max 1188 369 52 385 7 47
(CH) (SCAN) (UK) (CH) (DE) (PT)
11
62
Median 604
106 69
201
Min 325 147 76 -7 32 77
(PT) (PT) (AT) (PT) (ES) (UK)
Source: A.T. Kearney A.T. Kearney xx/mm.yyyy/00000 6
7. Hugely different income realization from customers across
Europe
Income per customer (€, 2011)
■ Swiss, but also Italian banks fare high in realizing
income per customer, driven by
1.188 CH
• Assets / wealth of customers
• Product mix
948 IT • Account pricing
• Transaction intensity
725 BNL
681 FR • Consumer lending
621 SCAN
588 AT ■ No correlation with
512 ES
• ‘Overbanked‘ or ‚overbranched‘ symptoms
420 DE (Italy, Spain, Germany would need to be low)
359 UK • Pension system situation (Germany to fare better,
325 PT Switzerland/Netherlands/Austria lower)
■ Suspected room for improvement rather within
banks business models
Source: A.T. Kearney A.T. Kearney xx/mm.yyyy/00000 7
8. Interest income has gained in importance
Business mix: Interest Income/Total Income (%)
73
69 68 69 70
65 Other European Banks
68 63
55 56
59 59 France
52 Portugal
47
39
2007 2008 2009 2010 2011
Source: A.T. Kearney A.T. Kearney xx/mm.yyyy/00000 8
9. Two crises: Relief on the risk side across Europe – with the
exception of three countries
Risk Provision/Total Income (%)
28
IT + ES + PT
21
19
14
16 12
9 10
Other European Banks
11
8
2007 2008 2009 2010 2011
Source: A.T. Kearney A.T. Kearney xx/mm.yyyy/00000 9
10. Profits still notably below 2007 levels, two clusters of countries
Profit per customer (€, before tax)
■ Profits touched bottom in
2009, 25 percent below pre-
439
crisis levels
424
■ Profits still 15 percent below
pre-crisis levels, recovering
315
■ Spain and Portugal first more
stable, now exhibiting
221 downward trend
205
185 183
147 Other European Banks
162
76
ES + PT
2007 2008 2009 2010 2011
Source: A.T. Kearney A.T. Kearney xx/mm.yyyy/00000 10
11. Slow start into 2012 – uncertainty in Europe
■ Comparably positive drivers at work: ECB Long Term Refinancing Operations (Nov 2011,
Mar 2012); stock market recovery – but still uncertainty on Euro and sovereign situation
■ Banks unable to capitalize on this:
• Investor sentiment: Commission income down as investors remain reluctant to trade
• On-balance sheet: Deposits rising as investors – and banks – move to on-balance sheet
products and funding; compensates for margin pressure despite lower new loan production
• Risk management: Focus area, mixed picture, with some banks reducing and others
increasing on a year-on-year basis; the overall picture is a continuation from 2011
• Cost management: Claims of ‘strict cost control’, ‘IT cost reductions’, or ‘rapid improvement
of cost efficiency’ – truth is more demure: Cost just contained or even increase, leading to
worsening cost-to-income ratios
■ Outlook characterized by uncertainty, recapitalization and bank restructuring
Building resilient models: In light of higher risk levels, capital requirements,
client reticence, more efforts to overhaul delivery and service models expected
Source: 2012 Q1 segment reports, A.T. Kearney analyis A.T. Kearney xx/mm.yyyy/00000 11
12. Outlook: Cost and service model transformation of the retail
bank
■ Operational excellence: Cost-income ratio differences significant, banks to work all levers
across structure, process, IT leverage, smart sourcing and skill & capacity management
■ Complexity management: Getting rid of legacy burden from products across sales structures
to processes and IT; potential of 30-35 percent reduction of products/features, IT cost savings
■ Pricing realization: Structural and cultural change in (1) services provided free of charge, (2)
free basis (current account) services, and (3) undercharging/hidden rebates/special conditions
■ Service innovation: Leverage “frequency” generated by transactions to provide paid services
on top; leveraging large customer bases to innovate, dare to trial and error
■ Service excellence: Focus on ‘better’ rather than on new customers, driving service intensity
to treasured customers in systematic way (vs. intuitive relationship manager-driven)
■ Multichannel-centric banking: New delivery models and new role for branch within
multichannel mix, enabled by data storage, analytics, communication and device evolution
Source:, A.T. Kearney A.T. Kearney xx/mm.yyyy/00000 12
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