European Banks – Where has all the Money Gone?

• In this report, we examine 10-year history of European banks revenues and pre-provision income
• Those banks with large capital markets and wholesale banking business have tended to underperform retail-focused banks
• The decade was marked by numerous deleveraging and restructuring exercises which have affected profitability

Continuing our series that began with Opportunity of a lifetime or a siren call? and European Banks Provisioning – Cost of Crises Past, in this publication we examine the trends in European banks net revenues and pre-provision income since after the Global Financial Crisis (GFC), beginning in 2010. Why focus on these two metrics? In short, a company’s journey to profitability starts with the top line and banks are no different. Furthermore, it has become an often-cited refrain to blame underperformance on low rates and the resulting pressures on revenues and net interest margins. But it is not as simple as that. Consider the fact that the average maturity of a bank’s assets is usually longer than its liabilities (in fact this maturity transformation is one of the key functions of a bank), it can benefit from a decrease in rates at least over the short-medium term. Of course, this also depends on what portion of assets and liabilities are fixed vs floating. as well as other factors. But the key point here is that complaining about low rates is counterproductive, given that this has been the state of play for the last ten years, and we believe will continue to be the case for some time to come.
As for pre-provision income, we believe it gives a good insight into operating characteristics and performance. Intuitively we would have expected for pre-provision income to rise as a % of revenues as banks should have become more efficient with mass adoption of new technology. But this, we found, is far from the reality.

Europe is not a country…Similar to our aforementioned piece on provisioning, we will focus here on six of Europe’s largest banking markets – France, Germany, Italy, Spain, Switzerland and the United Kingdom. We should point out again that each of Europe’s banking systems is driven by its own set of drivers, and therefore the starting point for most analysis is the comparison to domestic peers. The caveat is that some of the institutions derive a significant portion of their revenues and pre-tax income from foreign jurisdictions, which has to be taken into account when making comparisons. We also examine the two best and worst years for both revenue and pre-provision income and how 2019 has compared to those years.

FranceFor France, we look at a sample of four banks – BNP Paribas, Credit Agricole, Natixis and Société Générale – which together comprise the majority of the French banking system. In the period from 2010-2019, the best aggregate net revenue years for these banks were €98.6bn and €97.9bn, in 2019 and 2010, respectively. In comparison, the worst years were 2012 and 2013, when the French banks reported aggregate net revenues of €82.2bn and €84.4bn, respectively. As for pre-provision income, the best years for the French banks were 2010 (€35.8bn) and 2011 (€35.2bn). The worst years were 2014 (€21.0bn) and 2013 (23.7bn), though it’s important to note that 2014 results were skewed by an US$8bn fine that BNP Paribas had to pay for violating US sanctions. The aggregate pre-provision income reached €30.1bn in 2019. It is interesting to note that while the pre-provision earnings have decreased over the period, revenues have recovered and currently stand at a slightly higher level than in 2010.

Germany & SwitzerlandFor Germany and Switzerland, we look at a sample of four banks – Deutsche Bank, Commerzbank, Credit Suisse and UBS. With two-thirds of German banking assets held by cooperatives and savings banks, Deutsche and Commerz are far from comprising the majority of the domestic market but nonetheless give a representative sample. In comparison, UBS and Credit Suisse comprise a more significant portion of Swiss domestic banking assets, but Switzerland also has a healthy system of cooperative and cantonal banks. As far as aggregate net revenue is concerned, the two best years for these banks were 2015 (€92.2bn) and 2011 (€85.6bn). The two worst years were 2018 (€75.7bn) and 2019 (€76.4bn). While 2015 was the best year revenue-wise, it was the worst year for pre-provision income. The group barely broke even due to Deutsche Bank’s pre-provision loss of €5.3bn and Credit Suisse’s loss of €2.2bn. 2016 was the second-worst year, with an aggregate pre-provision income of €3.2bn, and the chief culprits were again DB and Credit Suisse. 2010 and 2011 were the best years with a pre-provision income of €19.4bn and €16.6bn, respectively. 2019 pre-provision income of €9.1bn was a far cry from those levels. And, even though 2019 was also the lowest year for revenues in the sample, the decline in pre-provision income was disproportionate to the fall in revenues.

ItalyFor Italy, we look at a sample of six banks comprising the majority of the Italian banking system – Banco BPM, Intesa Sanpaolo, Mediobanca, Monte dei Paschi, UBI Banca and Unicredit. In the period from 2010-2019, the best year overall was 2017 when the banks reported the highest revenue (€59.2bn) and operating income (€20.8bn) for the period. In comparison, the worst year for both revenue and operating income was 2016, a year marked by an acceleration in balance sheet cleanup. The second best year for revenue (€58.0bn) was 2010 and for pre-provision income (€19.2bn) was 2012. In 2019, the Italian banks in the sample reported aggregate revenues of €52.0bn and pre-provision income of €17.8bn. Interestingly this is not far from 2010 levels, suggesting that Italian banks may have had a decent 2020 ahead of them, this is now doubtful due to COVID-19.

SpainFor Spain, we look at a sample of six banks – BBVA, Bankia, Bankinter, Caixabank, Sabadell and Santander – which together comprise the majority of Spanish banking assets. In the period from 2010-2019, the best aggregate net revenue years for these banks were €94.9bn and €94.3bn, in 2019 and 2017, respectively. In comparison, the worst years were 2013 and 2011, when the Spanish banks reported aggregate net revenues of €83.8bn and €86.4bn, respectively. As for pre-provision income, the best years for the Spanish banks were 2018 (€40.9bn) and 2019 (€40.2bn). The worst years were 2013 (€29.7bn) and 2011 (34.5bn).

It’s interesting to point out that, notwithstanding the low-interest rate environment, Spanish banks have reported highest net revenues in 2019. Although a big part of that contribution is from overseas operations of Santander and BBVA, that do not operate under the challenging European environment. The pre-provision income in the last three years was also around the €40bn level, as we have seen at the beginning of the decade.

United KingdomFor the United Kingdom, we look at a sample of five banks – Barclays, HSBC, Lloyds, RBS and Standard Chartered. As Charts 9 and 10 suggest, it has been a one-way journey both for net revenue and pre-provision income in the period 2010-2019. But before we point out the best and worst years (which is quite clear from the charts), few caveats are in order. First, all of the institutions in the sample have gone through one or more balance sheet reduction programs which inevitably eroded revenues. This is especially the case for those institutions with large investment banking and capital markets operations (e.g. Barclays, RBS, Standard Chartered). The second significant factor was the multi-year cycle of compensation for mis-selling of the payment protection insurance (PPI), which ended up costing the UK banks around £45bn during the decade. Lastly, RBS, which has undergone an aggressive deleveraging program during the decade, has reported losses of €4.7bn in 2015 an €4.1bn in 2016. This corresponds to the least profitable years for the UK banks in the sample (as per Chart 10).

With those caveats out of the way, the best years for both revenue and pre-provision income were 2010 and 2011, with aggregate revenue of €161.0bn and €152.3bn, respectively and pre-provision income of €65.4bn and €54.3bn. In contrast, the worst years for revenue were 2018 and 2017, with €118.1bn and €118.6, respectively. As for pre-provision income the worst years were 2016 and 2015, with €19.0bn and €24.6bn, respectively.

What next?In conclusion, one pattern is evident here. The banks exposed to wholesale banking / capital markets business have done worse over the decade than their retail counterparts. Some of this is due to legacy issues which originated from before the GFC. But management failure is also to blame in the post GFC era, as time and again, banks have assumed changes in the wholesale banking markets were of cyclical rather than secular nature. At the risk of sounding cynical, when the interests of individual and organization diverge, it is those of the individual that tends to prevail. Shareholders need to keep holding management responsible, but this is easier said than done in large organizations with diffuse shareholder ownership.