For over a decade many European banks have struggled to stay above the profitability line, according to Kearney’s 2021 European Retail Banking Radar Despite implementing significant cost reduction measures, such as reducing branch networks and laying off employees in numbers, European banks’ cost-to-income ratios (CIRs) have remained largely unchanged.
Then came the 2020 COVID-19 pandemic which took its toll on what remains of regional banks’ struggles. This was evident in the declined loan demand by customers, skyrocketing provision for loan losses as banks expected more businesses to go insolvent, hindered bank liquidity, dip in fees and commission, shrunken net income due to lowered interest rates, and a downturn of issuance and trading activities in capital markets. The multiple recessions and consolidation of niche-based digital banking solutions developed by disruptors over the years didn’t help matters.
The result of these effects and more was a 62% drop in post-tax profit and net losses recorded across many European financial institutions, so much so that the European Central Bank (ECB) warned that profits may remain weak till 2022. 70% of European banks generated a profit per customer below €100 in 2020 – that’s one in ten banks reporting a loss, and a 30% drop in profit per customer. Large banks lost market share, suffering a 5% drop in revenue year-on-year (YoY).
In contrast, US banks performed fairly better, weathering the coronavirus effects better than their European counterparts. They boast of losing only 1% YoY revenue and suffering a 37% drop in post-tax profits. We can attribute this performance to the US economy taking a dent off the pandemic impact (3.5% GDP drop) compared to the blow suffered by the Euro Zone economy (6.8% GDP drop).