Global consultancy, Kearney, has released the fifteenth edition of its annual European Retail Banking Radar. This radar tracks the performance of 89 retail banks across 21 European markets.
In the face of uncertain macroeconomic conditions and continued inflationary pressures, the research from Kearney has found managing costs, investing in digitisation and maintaining customer trust critical to banks maintaining performance in 2023.
Strong year for banks in 2022
The latest report shows that 2022 was a record-breaking year for European banks. Rising interest rates provided a tailwind that boosted income across the board.
At €650, income per customer was at its highest level since 2015. Amongst the larger economies, the UK shows the strongest growth of 16.5 per cent. Compare this to 3.8 per cent in France, 3.5 per cent in Germany and 4.6 per cent in Italy. Eastern Europe overall also showed strong growth of circa 18.7 per cent.
Productivity over the last 15 years has also dramatically increased. Productivity per employee in 2022 almost double (197 per cent) what it was in 2008, and productivity per branch almost triple (284 per cent).
Cost management remains critical
Improvements in technology and digitisation have clearly supported this jump in productivity and have allowed for a lower physical footprint and reduced headcount. Overall headcount at European banks has reduced by 16 per cent between 2008 and 2022, and the number of branches has reduced by 42 per cent. However, this has not translated into a lower overall cost base, which increased by 2.3 per cent to €188billion last year.
Fortunately, this increase was significantly lower than income growth, meaning that the Cost Income Ratio for European banks was 58.8 per cent. This is its lowest level in the past 15 years. Banks must continue to work on containing and reducing costs if they are to build on the success of 2022. This task will become challenging in an environment with significantly higher inflation than at any point in the past 10 years.
Further European findings include:
- Income growth (seven per cent) significantly outpaced the business volume of growth (four per cent) for the first time in the history of the Retail Banking Radar
- Overall risk provisions as a percentage of income increased slightly from five per cent in 2021 to 6.5 per cent in 2022
- Total profit in 2022 increased 11.9 per cent YoY
- Overall client deposits increased 3.7 per cent YoY
- Income per employee increased 10.2 per cent in 2022 YoY
UK-specific data includes:
- In 2022, the total profit of the UK banks covered by the radar increased 8.1 per cent compared to 2021
- Client loans increased by 4.1 per cent in 2022 compared to 2021
- Employee headcount in UK retail banks down 3.4 per cent in 2022 compared to 2021
Preparing for challenges ahead
Sameer Pethe, partner at Kearney, comments: “It is positive to see such a strong performance from the European retail banking sector in 2022. While many indicators point towards the continued growth of income and profitability, the recent failures of SVB and Credit Suisse have demonstrated the risks present in a very complex macro-economic environment.
“Moving forward, it will be particularly important for banks to build and maintain customer trust and confidence. Once a run starts, it can turn into a self-fulfilling prophecy and this is something that banks must avoid. But banks need to do more to attract and retain customers, too, they need to deliver easy, simple, and personalised interactions that are relevant to the financial lives of customers.”
Roberto Freddi, partner at Kearney, added: “It is clear that in recent years, new technology and digitisation have been key factors in improving the performance of the retail banking sector. These banks now have a real opportunity to further capitalise on the benefits of technology by increasing strategic investments in digital transformation. Improving business resilience will also be important as banks prepare to navigate the challenges ahead.”
Daniela Chikova, partner at Kearney, comments: “2022 has undoubtedly been a year of extremes. While revenue generation and profit levels have hit record levels across the board, we are still seeing events such as the collapse of SVB give rise to concern from depositors about their savings.
“Stabilising the ship should be a key focus of 2023, and banks have a leading role to play in this, focussing on customer trust, cost management and effective digitalisation.”