João Soares: Europe’s Largest Banks Face Eroding Financial Positions

Bain Partner João Soares discusses the state of banking in Europe and how customer loyalty has become a key success factor for winning banks.


João Soares: Europe’s Largest Banks Face Eroding Financial Positions

A number of European banks continue to struggle with their balance sheets. João Soares, a partner with Bain's Financial Services practice, discusses the firm's latest health check of European banks and how loyalty has become a key success factor for winning banks in Europe.

Read the Bain Brief: Slow Slide? Europe’s Largest Banks Face Eroding Financial Positions

Read the transcript below.

JOÃO SOARES: This year's health check continues to assess European banks. We assess the banks across two dimensions: profitability and efficiency (i.e., the ability to generate capital in-year); but also the resilience of the balance sheet to further shocks, which has a balance sheet view to it.

And so we find that there are a number of banks that tend to be Nordics or the Benelux banks that are particularly resilient, particularly well positioned. They are what we call "winners."

In the quadrant which is opposite that one, the ones that we call the "highest concern," we continue to find a number of Italian, Greek and Portuguese banks. This being said, there are banks that are with resilient balance sheets, capitalized but have not cracked the code on how to actually have efficient and profitable models. Many of the German banks and the British banks are now in this quadrant.

And, on the other hand, we also have banks that have profitable models, efficient but whose balance sheet is not particularly resilient to shocks. A number of Spanish banks are in this category. And so this is an evolution to the previous year's views, but there are other interesting conclusions.

The first one is that when we look at the top 10 banks in Europe, only one has actually improved its position. And it's a long-term trend. So the midcap banks have found ways to gain competitive position vis-a-vis the large ones. And that has been done through digital, through cost reduction, to finding new profit pools to actually find their business models or reinvent their business models, which the large banks apparently are either slow or unable to grasp at this stage.

This being said, loyalty is now proven to be a key success factor. And so as we measure Net Promoter Score for banks, the winners tend to have much higher Net Promoter Scores than the laggards, or highest concern banks. And this is the first time we've been able to analytically prove it by both combining Net Promoter Score and the health check of the banks. So it is surprising that there are still so many European banks in a fragile position, especially when the formula to actually find the solution to migrate them from the highest concern onto winners has been tried, tested and successful. And a number of banks has made this journey. But not all. So we'll still see all these journeys going ahead if management teams decide to embark on it.

Read the Bain Brief

Slow Slide? Europe’s Largest Banks Face Eroding Financial Positions

Investors may be overly optimistic about banks with relatively weak balance sheets.


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