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In our introductory blogpost to this year’s Retail Banking Monitor blogpost series, we have already outlined a brief overview of Retail Banking performance in 2021. Business has, in principle, developed in a positive direction across key performance indicators for the 10 largest European retail banking markets. This is also true if the past two years are considered, i.e., the first two years in which most banks started to engage in a more ambitious transformation of their retail banking business.
Based on European sample (weighted average YOY growth rate in EUR).
Diving into our Retail Banking Monitor sample reveals five key messages for 2021:
2021 was again characterized as a year with considerable growth in underlying business volume. Deposits increased 7% YOY, and loan volume surged by 6% YOY, driven by the ongoing strong dynamic in real estate and corresponding inflationary developments. Taking a closer look, we can identify three different groups of countries regarding loan volume per customer development in 2021:
Underlying business volume growth considerably exceeded topline growth (+4% YOY operating income per customer), which is an indicator that new business in 2021 was less profitable on average than the existing portfolio.
Breaking the European average topline growth of 4% down to a country and bank level offers interesting insights:
Overall, 2021 marks a year where location (country) has had a visible impact on how retail banks’ topline developed.
2021 showed strong development in fees and commissions, compared to interest income. In light of the challenging situation for balance-sheet driven business, retail banks have put considerable efforts into developing their fee and commission income through e.g., account pricing strategies, raising service fees and pushing commission-driven business. 2021 reveals tangible success – across our European sample, net fees and commissions grew by ~9% YOY, while net interest income grew by ~2% YOY. As a result, the share of net fees and commissions in total operating income is up by ~1.5ppt to ~32%, while the share of net interest income has decreased to ~64%.
Multiple lenders embarked (mostly during 2020) on ambitious cost transformation programs, whose effect and new run rates we only expect to see fully in the 2023 numbers. Nevertheless, some progress has become visible, as top-line growth exceeded cost growth during 2021, across the board. The overall branch network reduction is progressing well (-8% on average in 2021), and some players achieved continuous cost progress on their transformation agenda. It is, however, also fair to say that progress has been more limited than some would have expected and consider necessary, and individual lenders are already softening their cost ambitions.
As a result of the topline performance (+4%) and the marginal cost increase (+1%), operating profit per customer has developed nicely in 2021, with an average ~9% per customer increase. Again, we see a mixed picture when we dive deeper into the sample:
Driven by ongoing supply chain challenges, inflationary dynamics have picked up rapidly in recent months, along with corresponding interest rate measures. ECB announced a raise in the key ECB interest rates by 25 bps in July and will hike this again in September. It remains interesting to see if Switzerland will be able to maintain its currently less concerning inflation levels. All of this comes amidst the ongoing war in Ukraine, driving uncertainty both in international markets and in consumer sentiment. The broader macroeconomic developments, including a looming yield curve inversion, will significantly impact retail banking. We expect:
Overall, the big question in the short-term outlook for retail banks in Europe is whether inflation is here to stay (wage-price spiral), or rather a one-time effect predominantly limited to 2022 and 2023. Retail banks generally are on the right (performance) path. They have started to adapt and leverage the interest rate dynamics in their favor, actively seeking opportunities in deposit and balance sheet management and in risk management (e.g., real estate financing).
Overall, retail banks need to Reposition and Reinvent, combined with tactical and cost measures. To successfully address the challenges ahead, retail banks need to sustain their ongoing internal transition efforts – adjusting their growth focus to a volatile environment, watching their risks, and relentlessly managing their cost base. On top of these internal journeys already started, retail banks now face an external transition journey that provides for competitive opportunities to be seized in the short- to mid-term across the four aspects of transformation - Reinventing Sales, Reinventing Products, Purposeful Repositioning, and Repositioning for Embedded Finance - in order to come out stronger from this adjustment period.