London – 18 Sept. 2018– As we reach the 10^th anniversary of the landmark Lehman Brothers bankruptcy, European banks have managed to regain the trust of investors who have raised their overall valuations. But banks in Europe still lag their US counterparts when it comes to increasing resilience and revamping the way they do business.

Bain & Company’s 2018 Health Check of the Banking System report finds that the banking landscape in Europe remains under stress. More than a quarter of banks still appear as higher-risk, and need to take urgent action to ensure survival while the largest banks in particular have lost ground in both profitability and balance sheet position relative to the sector as a whole.

“Ten years post-crisis, banks in Europe still face challenges with regards to weak balance sheets and outdated business models,” said João Soares, partner at Bain and creator of the Health Check methodology. “In particular, the largest banks are struggling and losing ground to smaller competitors.”

The Health Check provides a uniquely integrated view, combining data from balance sheets and income statements. Bain & Company calculates a score for each bank, based on data from financial providers such as SNL Financial and Moody’s with banks’ own financial statements, placing it in one of four categories:

• Winners. Some 32 percent of the banks attained this strong position. Scandinavian, Dutch and Belgian banks continue to outperform on virtually all financial indicators.
• Weaker business model. Banks in this category represent 23 percent of the total, consisting primarily of UK and German banks, the business models of which continued to struggle.
• Weaker balance sheet. Some 19 percent of banks have a priority to fix weak balance sheets. Over the years, banks in this category have shown vulnerabilities not yet fully reflected in their profit and loss statements. Spanish banks make up a large share of this category, with capital positions that are much weaker than the median European bank.
• Highest concern. Of the total base, 26 percent of banks flash a high-risk signal. Banks in southern Europe—including more than half of banks in Italy, Greece, Portugal and Cyprus—have distressed levels of profitability and asset quality.

Largest banks are losing ground

Homing in on the largest banks, we see a greater cause for concern. Of the top 10 banks by assets, only one improved its overall position during the year; all others suffered a decline in financial health and resilience relative to the sector as a whole. If the top 10 were one institution, they would be in the weaker business model category for every year since 2013.

The biggest percentage-point difference between the largest banks and the rest occurs in the cost-to-income ratio, in which the median for the 10 largest is 69 percent, compared with 60 percent for other banks.

Editor's Note: To arrange an interview, contact Dan Pinkney at dan.pinkney@bain.com or +1 646 562 8102

# # #