Navigating European banks through and preparing for the world after the crisis

Navigating European banks through and preparing for the world after the crisis
  • Blog post
  • March 08, 2020

Dr. Philipp Wackerbeck, Marius Klee, and Felix Becht

Stress simulation and three economic scenarios

The development of the world economy heavily depends on the severity of the pandemic. To help European banks prepare for a potential financial storm, Strategy& conducted a COVID-19 stress simulation and created three possible economic scenarios based on different pandemic patterns:

Three scenarios for overall economy
  1. The short course
    The first scenario presumes a shock impact on the economy followed by a swift and complete recovery, therefore resulting in only mild repercussions. In this case, GDP levels would bounce back and recover by the end of the year. Overall, investment and consumption would be postponed rather than cancelled in this scenario.  
  2. The return to previous GDP levels over several quarters
    The second scenario depicts a sustained recession of the world economy. This severe impact would make a return to previous GDP levels only possible over several quarters. Performance and overall growth would therefore be affected for at least two full years, partly due to investments being further postponed and consumption being limited.
  3. The prolonged recession
    The final scenario considers the effects of deep restrictions on investments and consumption due to a long-lasting pandemic, resulting in drastic repercussions on the world economy and a prolonged recession. A return to the level of total output before COVID-19 is not foreseeable.

It is now vital for financial institutions to be prepared for the months ahead. Despite the fiscal countermeasures announced by governments around the world, banks will need to closely monitor the effectiveness of those and whether country-specific risks will materialize on a global scale.

The management attention of banks is now shifting
For most banks, the initial response to the COVID-19 crisis included activating business continuity plans, whilst occasionally dealing with operational challenges regarding remote working capabilities or internal communications. Leading banks have screened their risk exposures (credit, market, counterparty or operational). The diagnosis: COVID-19 will infect banks at various levels, however, the majority of financial effects have yet to materialize. As the further development of the pandemic is still uncertain at this time, our analyses also unveil a mixed picture of European banks with regards to their expectations of the impact on loan loss provisioning as well as on CET1 ratios.

While financial resilience is on the minds of some executives, the focus of many institutions goes beyond the immediate financial harm of COVID-19. Managers are slowly shifting their attention to steering firms and their market activities through the pandemic. The goal for all of them is to transform the business for a post-COVID world and emerge from the crisis stronger than the competition.

In order to succeed, managers will have to consider the wider implications for the banking industry. How will the landscape change if the federal government suddenly becomes one of the largest risk takers in the wholesale lending market? Will the need for physical bank branches and cash change? How will foreign competitors react to the crisis and will they repeatedly focus on their home markets, as they did in 2008 and 2009? But also, who will be the winners and losers of this crisis? Is COVID-19 accelerating national or cross-border mergers within the banking sector?

Many of these questions cannot be answered today. However, firms must prepare for a volatile period, overcome its challenges and seize its opportunities. After all, market shares can easily be won – and lost – in times of crisis.

To help banks steer through uncertainty and prioritize their actions, PwC and Strategy& have set up the following three waves models:

  1. Mobilize – Controlling the situation.
    What actions should be focused on in the short term?
  2. Stabilize – Navigating through the crisis.
    How to prepare for the challenges as well as the opportunities ahead
  3. Strategize – Winning through the crisis.
    Reposition strategically for a post-crisis setting

Particular steps that managers should focus on in order to emerge as winner in the post COVID-19 world include:

  • Envision societal and economic long-term implications
  • Review the business portfolio mix and develop post-COVID-19 business strategies
  • Assess the impact on the (banking) market structures and reconsider M&A options
  • Initiate a rigorous cost reduction program (pulling levers revealed by COVID-19 crisis)

Whatever the economic impact of COVID-19 on the financial sector may be, managers now have to shift their attention away from short-term measures and focus on the necessity and the opportunity to make strategic decisions in order to transform the business for a post-pandemic world.

Together with our CEO Agenda for European banks, the three waves model provides a blueprint to guide financial institutions through this volatile period. Over the coming days and weeks, we will publish further articles on Payments, Retail Banking, Corporate Banking, Asset Management, and more, outlining how the Financial sector can prepare for the challenges ahead, as well as seize potential opportunities.

Contact us

Dr. Philipp Wackerbeck

Dr. Philipp Wackerbeck

Partner, Strategy& Germany

Marius Klee

Marius Klee

Director, Strategy& Germany

Felix Becht

Felix Becht

Partner, Strategy& Germany