Due to COVID-19, over the past few months, nationwide restrictions on travel, work, and leisure across most European countries have led to a dramatic drop in consumer spend.
Meanwhile, repayment holidays on credit cards and loans and offers of interest-free overdrafts abound while base rates have been cut across most countries, leaving banks in a precarious position as their income levels drop while operating costs remain largely unchanged – according to a Research note from Kearney.
It is an unprecedented situation and the research predicts that despite best efforts, one in eight banks will suffer losses this financial year. The modelling has identified three predictions for how COVID-19 will impact retail banking profits in 2020:
Revenue will drop at least 20%
Banks are taking dramatic measures to make life easier for their customers. With government support, European banks are granting mortgage repayment holidays, cancelling overdraft fees, and increasing credit card limits.
Many countries have also cut their interest base rates in a bid to keep the economy afloat, leading to an additional pressure on revenue for banks. While there are a few notable consumer areas where business is thriving – food shopping, streaming services, and online retail – customers have dramatically scaled back their spending habits.
Travel, leisure, and entertainment spend has ground to a halt and customers are adopting a wait-and-see approach, especially on the lending side, where applications for new loans and mortgages have declined.
The modelling shows that this combination of payment holidays, low base interest rates, reduced economic activity, and reduced revenue from management fees of financial assets under management will result in an average 20% decline in retail banking revenues.
This is a base scenario, relying on a partial recovery toward the end of the year. However, it’s very likely that revenues could drop by 35 to 40%F, depending on the starting point and revenues mix between different European banks.
“The combination of payment holidays, low base interest rates, reduced economic activity, and reduced revenue from management fees of financial assets under management will result in an average 20% decline in retail banking revenues.”
Costs will by and large remain the same
Along with most other sectors, banks are entering a holding pattern where basic operations need to be kept afloat as they consider what they reopen and what they agree to restart following the introduction of a crisis operating model.
Many banks are committed to keeping their headcount – a move that plays favourably with both the media and public opinion, as well as being a sensible long-term investment. But while the attention is on management salaries and bonuses, news is also emerging of pay cuts, reduced working hours, and voluntary unpaid leave across regular staff.
Most branches have ether closed or reduced their operating hours, and some governments have issued rent deferrals, which may alleviate some of the short-term operational costs. However, for the most part operations costs remain the same for banks, leading to a tight squeeze on profit margins.
The research suggests that this will push the average cost income ratio up to ~80% with some banks seeing costs exceeding revenues. All of this will need to be weathered before banks see an uptick in revenue.
Some banks have also taken on the additional expense of launching new and improved digital services for customers, such as Lloyds Bank providing free digital training and issuing free tablets to elderly customers, Intesa Sanpaolo launching pre-approved credit lines to small businesses and families in need, and TSB setting up dedicated customer care chatbots among other online features to channel customers toward specific services designed to help those in need due to the outbreak. Such examples demonstrate how banks are taking the opportunity to deliver high-value services at a relatively small cost, allowing them to actively support customers during the outbreak.
This is not only the right thing to do, it’s also a shrewd move. Those banks will be remembered for the active participation they took in helping their customers through a challenging time. The trust they gain from customers will not only be rewarded through increased loyalty and new business but will also prepare the bank’s customer services for a world post-COVID-19.
After all, it is unlikely that customers will fully return to their pre-COVID-19 habits and the crisis is likely to become a catalyst for a permanent shift toward more digital banking habits.
1 in 8 banks will face losses this financial year
Even with modest impairments, it will be a tough year for banks—along with most other sectors. The report estimates suggest that up to 12% of banks could see losses in the current financial year, with profitability per customer being reduced by as much ~60% compared to 2019.
The crisis presents unprecedented challenges, and its long-term impact is yet unknown. However, by looking after employees, proving value to customers, preparing for the worst economic scenario, and fortifying core business activities, businesses stand the best chance of emerging from the crisis stronger.
Many banks will be looking back to the last decade and revisiting how they weathered the Global Financial Crisis and navigated the recovery. There are some obvious similarities – and differences – between the COVID-19 crisis and the Global Financial Crisis that will be examined in more detail in the next instalment in the series.