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UK and European banks’ profits ‘hide the reality’, warns study

UK and European banks have a potential crisis on their hands in the near future, according to a new study warning of the fierce competition posed by new financial intermediaries

Profits enjoyed right now by UK and European banks “hide the reality” and are unsustainable, according to research.

A new study of the 50 largest banking groups in Europe by strategy and management consultancy zeb shows that the current conditions in which these firms are operating are unstable, due to low valuations and market share.

Their profitability rose from 3.9% to 7.1% last year, but the analysis indicates that this is because profit improvements from reduced non-litigation and extraordinary costs have allowed net profits to surge.

This obscures the fact that maintaining this rise in profitability would be almost impossible, while banks struggle to cope with the competition from other financial intermediaries.

These organisations now account for almost half of the assets in the European financial sector, growing from 22% ten years ago to 48% in 2017.

When coupled with insurers and pensions funds, that share reaches 63% of what used to belong almost exclusively to the banks.

Bertrand Lavayssière, managing director at zeb UK, said: “While these profit results may look positive, they are, for most institutions, superficial and hide the reality.

“With unsustainable profit-taking and non-banks continuing to gain market share, banks have built profits on a windfall situation.”

uk and european banks
Bertrand Lavayssière, managing director at zeb UK (Credit: Twitter)

Actions for UK and European banks to take

In addition to warning of a potential future crisis, zeb’s study outlines four strategic options banks can opt for in order to combat the gloomy market conditions and produce value by offering something unique.

These include pursuing more mergers and acquisitions, focusing on product specialisation, breaking up the value chain and participating in financial ecosystems or platforms.

Mr Lavayssière added: “Top performing banks will be those who are most capable of selecting a path of true differentiation while simplifying and standardising the rest.

“The time has now come to shift towards operational improvements and to decouple those aspects of the value chain that no longer enhance value for customers.

“A decade after the banking crisis, we have now reached a tipping point and banks urgently need to switch from ‘recovery mode’ to ‘action mode’.”