Disruption as a force for change (Part One)

Every week, it seems that there is a new entrant to the banking sector claiming to be ‘disruptive’.

Disruption as a force for change (Part One)

However, is this really the case? Big banks do not appear to be heading anywhere. New research from PricewaterhouseCoopers (PwC) states that they well might.

Many experts have looked at the financial sector in its current state and decided that while banks are under threat, there is still time to move the ship away from the iceberg.

On this point, the report asks: “Have [banks] done this? So far, not really.”

Bank inertia
While the report, entitled The Future Shape of Banking in Europe, gives credit to banks for progress on fronts such as regulation, legacy remediation, trust, customer service, and operational innovation, it claims that this has not been enough.

In the midst of a ‘crisis in European banking’, the sector has consistently missed its performance hurdle rates (meaning their average return on equity was less than their average cost of equity) by some way.

While some underpeformance can be attributed to one-off asset write-downs, fines restructuring charges, and the like, net economic spreads have stuck at around – 6% for the past two years.

The report posits that one reason for this is that Europe is overbanked. Europe has 130 large banks (over €30bn in assets) working in a €15.3trn marketplace. That equals one bank per €118bn of GDP. In contrast, there is one large bank per €302bn in the US, one per €214bn in Canada and one per €144bn in Australia.

As a result, cost-efficiency in the European market is not as high as in others. Cost-to-income is an average of 80%, compared to the global average of 65%.

The report states: “The bottom line is that there are too many banks in Europe, doing too much, in a structurally unfavourable market environment.”