By Diederick van Thiel
To find the answers, let’s first have a look at how the big ones performed in the first half of 2020. HSBC, Europe’s largest bank by assets reported a 65% fall in pre-tax profits to $ 4,3 billion. BNP Paribas, Europe’s second bank reported a 7,4% fall in pre-tax profits to € 3,1 billion. Credit Agricole, Europe’s third largest bank in assets showed the same trend. A fall in pre-tax income of 23,3% to € 3,9 billion. Banco Santander, Europe’s fourth bank in terms of assets, on an underlying basis, slid attributable profit to the parent by about 53 percent to € 1.9 billion. Barclays reported a 66% plunge in profits for the first six months of the year, hurt by declining business in its UK group. If you look at the other European banks, we see the same trend. One could say that the profitability of the European banks currently is really extremely hit.
The reasons for these dramatic results are, according to the banks, in the instable macro-economic situation. Let’s phrase it as a collective “pandemic banking pain” for which they all increased their bad loan provisions tremendously. But with the increased provisions, the strategy to win in the current markets has not yet been found!
Costs perhaps? The European Central bank already hints for a longer time on bank consolidation. Efficient banks should take over less efficient ones. And, if results are poor, banker’s natural response is to cut costs harder. From my experience in the C-level banking suite cost containment always is a good thing as long as it improves efficiency and does not destroy the business! Banks can benefit from the pandemic pain by increasing their efficiency. By selling less profitable business lines and speeding up their digital transformations to improve their cost-income ratio’s and customer experiences.
But there is more! In my recent academic research across European banks, which is currently being reviewed for publication by the Journal of Banking and Finance, I found that the COVID-19 pandemic has revealed serious flaws in the business models on which banks rely. Banks are losing their effectiveness as they are experiencing ever more model failures, and further issues can be expected with time. Model failures have been caused by pre-COVID-19 model assumptions, their reliance on historical data without access to high frequency data and their low agility to integrate new data. To put it simple, bank’s business models are old fashioned, real blockers of their efficiency transformation and fundamental threats for their effectiveness. Banks must therefore urgently review their model strategies on their effectiveness. This is heavy stuff for bankers who are, in their core, managers of risk and used to these old ways-of-working. And now, the fast-changing customer behavior, high speed of cloud and artificial intelligence development, combined with the highly instable macro-economic situation shows that the still traditional core of the bank brings in fundamental material financial risks and need to be transformed fast.
So, despite of the stable or even rising underlying income of the banks, despite the positive news for bankers in last weekends’ Dutch financial times however that credit applications in the Eurozone are at the same level of pre COVID-19 again, banks executive boards urgently have some serious strategic work to do. Time is running out!
This is the year in which they have to invest in their effectiveness. In which they have to re-evaluate their business models, re-asses their enterprise risk frameworks, speed up structural implementation of human centered innovations with new interactive technologies and data to find their way out in this instable macro-economic environment. Together with Cambridge University researchers I developed a digital maturity scan to support strategy and roadmap development for winning effective banks. Strategic drivers which we found essential to assess are:
Next to my fundamental academic research in these areas that make future winners and losers in banking, I will post blogs on these individual topics of banks effectiveness in the upcoming 12-weeks. Blogs which content comes from my research that will be published in my book on “Human Centered AI Growth Strategies in Banking” to be published in H1 2021. One thing is clear: bank executives have to act now to fundamentally increase their effectiveness! It’s eat or to be eaten in the extreme pressures from the market. In times of crisis the essence lies in the claim that natural selection is a creative force. Those who adapt fastest and smartest will be the winners! At the end of the 12-week blog series I will announce the 2020 European effective bank winners and losers. Banks that have effective strategies and execution and that can become love-banks in the future. Love-banks winners with the most glorious future.
This article has also been published on Finextra (11 September 2020)