European banks are gambling with their future

European banks are gambling with their future

By Pierre Reboul, global head of wholesale banking practice, Eurogroup Consulting

European corporate and investment banks (CIBs) have lost ground in recent years to American competitors. Over the past ten years, their market share has fallen from 50% to 33%, and over the past five years, they have had a 25% drop in overall turnover, from €82 billion to €61 billion. The performance gap has been increasing between organisations on both sides of the pond.

Eurogroup Consulting carried out a study to understand this trend, including interviews with numerous senior CIB executives alongside qualitative and quantitative data. We unveiled the reasons for this performance gap and outlined possible solutions for CIBs.

Looking at the current market landscape we found that European CIBs’ operating revenues have dramatically decreased. Whilst European CIBs are back on the growth track now (aided by the macroeconomic environment and their market positioning), US institutions are nevertheless still more advanced in terms of restructuring programmes and they have been focusing on top-line strategies for several years now. Consequently, US banks have been gaining market share vs. European peers, generating 66% of the industry operating revenues in 2017 compared to 50% in 2007.

US banks enjoy strong competitive advantages over European banks, linked to the state of their own market and a more flexible regulatory environment. The US also has a Department of Justice which, in the past, has severely fined a number of European banks. In contrast, regulations have increased in the European market in the past decade. Possible future regulations more favourable to banks in the City of London post Brexit would increase the lack of competitiveness of European CIBs.

But the key factor for the performance gap between US and European banks is the slow pace of European CIBs to reorganise and digitalise their operations, a shift that is much more advanced in the United States. This requires adapting business and operational models for the organisation to become more customer-centric. This doesn’t just mean company IT systems, but also banking structures, skill sets, methodologies and decision making.

Digital is an increasingly essential driver of performance. It is changing the day-to-day operations of corporate bankers and is impacting both income and cash flow statements. There is a strong risk though that banks may not be able to implement digital projects on the scale required if they fail to mobilise staff from the bottom up.

Hence the birth to a new generation of banker: The ‘Augmented Banker’. This ‘Augmented Banker’ is a banker that spends less time doing repetitive tasks and focuses on performing new higher added-value tasks, enabled by technology. But there is a huge gap between planning a fully-fledged digital strategy and the reality of implementing it. For European CIBs to bridge this gap, comprehensive digital transformation requires both ‘hard’ (i.e. technologies, start-ups) and ‘soft’ transformation (i.e. a truly bottom-up approach that will involve people).

We believe the ‘Augmented Banker’ is first likely to appear in Compliance and Investment Banking roles as these are the areas where digital innovations and technology are within reach. To create the ‘Augmented Banker’, European CIB human resources departments will need to secure the appropriate skills and foster engagement among its employees in favour of the organisational change.

Under the Chief Digital Officer’s supervision, the ‘Augmented Banker’ should drive the transformation using agile and innovative approaches to experiment, co-create and scale digital initiatives within the organisation. Embracing the new breed of ‘Augmented Bankers’ will help European banks to survive digital transformation by applying their digital mindset and skills to embed change.

European banks need to build market resilience using upgraded IT systems, enhanced analytics capabilities and, above all, their human capital. They should focus first on enhancing the customer experience, and of course, also keep their projects targeted and cost-effective. In the current volatile macroeconomic context, the resilience of a European bank against the shocks of a potential financial crisis should remain at the heart of any organisational change project.

These profound shifts require traditional European CIBs to adapt – and fast. If the ‘Augmented Banker’ of the future - multi-channel, agile, super-compliant and customer-focused - remains the ideal to aim for, they need quickly lay the groundwork to develop this profile and free-up time for higher added-value tasks. Transforming the knowledge, expertise and skills in large organisations is a colossal challenge, and is a lengthy process, but in the case of European CIBs, time is of the essence, they must act now, it is about their future and their survival.

 By Pierre Reboul, global head of wholesale banking practice, Eurogroup Consulting

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