According to the Economist (recently commenting on The Banker Top 1000 World rankings) Europe’s banks’ profits declined from US$363bn in 2007 to US $44bn in 2011. In its analysis of the pre-tax profits of the 1,000 largest banks it comments:
“In 2007, banks there made $363 billion, but by 2011 this had shrunk to $44 billion as Europe’s debt crisis continued. Of the world’s largest 1,000 banks in 2011, 24 of the 25 biggest lossmakers were based in western Europe, losing $121 billion between them.”
There is no doubt that debt write downs are the main driving factor here. Until there is some light at the end of the Euro crisis tunnel, this trend will continue.
The low interest rate environment is robbing the banks of one of its traditional sources of revenue. In the past margin generated from free funds in current accounts and from traditional low interest demand deposit accounts meant that banks could already be bagging a healthy daily profit before opening their doors.
The level of these funds is dwindling. Many companies, with a much bigger focus on risk, are increasingly ‘sweeping’ funds out of their service providing banks into safer overnight havens depriving the banks of these idle balances and reducing their net interest margin. These and other factors are forcing the western banks to look at other revenue sources to boost profits.
In the competitive market banks offered companies generous deals on bank fees to win their transaction banking business (clearing services). This is fine for the large global players like HSBC and Citi with lucrative franchises in Asia Pacific to fall back on.
It is a different story for the domestic focussed European banks like RBS (2010/2011 net interest margin declined 12% to 1.92%) and Lloyds (2010/2011 net interest margin declined 6% to 2.07%). This puts them under pressure to increase fees and lending margins as the only means of generating sufficient profits to meet shareholder expectations.
The domestic banks will increase prices and prune their vast branch networks to reduce overheads. What companies really need is lower cost technology driven solutions. Larger companies will surely migrate to the lower cost solutions offered by the larger global banks. These banks with their deeper pockets are also more likely to be forthcoming if credit is required.
Corporate treasurers need to look strategically at their choice of banking partners to make sure the objectives of both company and bank are aligned. Old loyalties must be cast aside – whereas some banks might stay, their people, their senior management and their decision makers come and go. This will be exacerbated if the cull of bank staff continues.
Companies must no longer leave all of their eggs in the one basket. They need more independence and more options for their transaction banking platform so that it can be easily migrated to another bank should the need arise. Companies must have greater control over their future and banking independence is crucial for companies to ensure their success.