European banking sector´s challenges and opportunities in the post-pandemic recovery phase

Oliver Wyman´s reports analyzes how European banks have performed during the pandemic and what role should they play during the economic recovery. According to the report, the sector has proven resilient during the covid-19 crisis, but the work of footprint rationalization, consolidation, digitization and cost reduction must go on. Alongside this, the sector has a “once in a generation opportunity” to gain a strong sense of purpose, to reinforce the level of trust in banks, and to forgo stronger and deeper relationships with their customers, by helping to tackle some of the big issues that Europe’s economy has to face such as digital or climate transition.

The highlights of the report are as follows:

• European banks have proven resilient during the pandemic. Banks “have blunted or deferred many of the pandemic’s economic impacts” thanks to the capital levels built-up after the financial crisis and the unprecedented government support programs. In fact, according to Oliver Wyman, “one in three banks already has released credit provisions”. However, profitability remains under pressure as return on equity is less than 4 percent for half of the industry.
   
• The covid crisis has provided an opportunity to focus in new customer and workplace behaviors and to improve efficiency. Banks have made relevant operating model changes during the pandemic: branches closed, all staff working from home, processes redesigned overnight. According to Oliver Wyman, the work of footprint rationalization, consolidation, digitization, and cost reduction must go on as “a further cost-income ratio reduction of 5 percentage points should be targeted, saving at least €30 billion”.
   
• From a macroeconomic perspective, there are still risks in the horizon. The report mentions some of them such as asset bubbles, caused by excessive market liquidity, low interest rates, a speculative frenzy in digital assets and the return of inflation.
   
• The sector has a once-in-life opportunity to gain a strong sense of purpose, grow the bottom-line, and ensure its ongoing relevance in the economy. To that end the sector will have to support the recovery, “helping to tackle some of the big issues facing Europe’s economy”. Oliver Wyman identifies five challenges than should be addressed to do this effectively, from the role of the banks in supporting the climate and digital transition to the provision of a broader range of services and financing solutions to play a relevant role in the allocation of the €750 billion Next Generation fund.