The European consulting firm EUROGROUP Consulting, in an exclusive annual study on corporate and investment banking (European CIB Outlook 2019), reveals the numerous challenges European CIBs urgently need to address, and outlines strategic and organisational solutions to help them reduce the performance gap with their US counterparts.
● There are numerous constraints on European banks: digital transformation, increased market volatility, historically low interest rates, a new wave of stringent regulation, massive investment in infrastructure, the introduction of pay caps for executives.
In fact, European banks are struggling and losing out to American banks, which have managed to strengthen their position in Europe, notably by relying on a large domestic market and a more favourable regulatory landscape.
● A large majority of European CIBs experienced significant financial difficulties during the 2018 financial year. Despite an increase in overall CIB business revenue of 3.5% in 2018, mainly driven by Equity and Prime Services and a favourable exchange rate, Equity and Prime businesses fell by -21.6% causing in a -10% year-on-year fall in revenue in the first quarter of 2019.
● Even the cost reduction programmes put in place do not offset the decline in turnover.
According to Matthieu Prieuret, Partner of EUROGROUP Consulting in London, “The future prospects are bleak if European CIBs do not change their model. They must now consider drastic structural changes and adress the fundamental constraints that the industry is currently facing by optimising their cost base and revitalising their talent to close the gap with US banks and protect their positions.”
● The European CIB Outlook 2019 study identifies three avenues to recover profitability and competitiveness and capitalise on talent by focusing on:
- Assets industrialisation (operations and technology) to pool together and reduce costs could increase profitability by around 2-4%.
- Structured finance opportunities and next generation financing model would generate revenue growth and improve profitability by 2-3%.
- Talent empowerment: Granting more autonomy to teams and revitalising talent could lead to an increase in RoE of around 1-2%.
● The study also highlights the importance of reshuffling the organisational models, alongside the implementation of innovative managerial practices, both essential to address evolving client-centric requirements and efficiency. Talent management is identified as an essential element that creates a link between technology and bank performance.