"What's next for the European Banks?" by Gikas Hardouvelis

Posted by economia 07/03/2019 1 Comment(s) Economia Blog,

Presentation by Prof. Gikas Hardouvelis

Delphi Economic Forum, panel session "What's next for the European Banks?"




Two opposing forces influence European banks






1)Low risk – the positive force

2)Low profitability – the negative force

Both forces are due to the aftermath of the international financial crisis 2007-2009

  • The negative force of low profitability has dominated European bank valuations up to now
  • Yet the second positive force of low risk may dominate in the future; no one knows for sure

Greek banks faced a deeper crisis, losing twice ~100% of their value in February 2012 and November 2015

  • Now for a third time they face demise as their valuation is at 35% the post recapitalization level of 11/ 2015
  • They are pressed to shed their NPEs quickly











European banks today relative to 2007


Balance sheets are now smaller and more robust (safer)

  • Asset size shrinks as credit growth declines and is negative for some time
  • Loans are now a larger fraction of their assets with NPLs down from €1 trillion in 2014 to €600bn in 2018
  • Liability side is stronger as share of deposits & core capital increase


Regulation is now stricter: Basel III, biennial stress tests & annual SREP

  • Total core capital increased by ~40%
  • Risk weights increase in the denominator of the CAD ratio (although risk-weighted assets decline together with total assets)
  • In the top 20 banks, from approximately 8.2% Tier I CAD ratio in 2007 to ~ 13.8% Core Equity Tier I ratio in 2018, and from 3.6% leverage ratio in 2007 to 5.8% in 2018


Profitability is lower as banks shy away from speculative trading and rely more on traditional lending activities. In the top 20 banks,

  • Total revenue declined -23% (Fees & commissions -22%, Trading Income -54%, whereas NII increased a bit, 12%)
  • Operating Expenses declined by less, -9%, and Cost-to-Income ratio increased from 55% to 62%
  • Hence Net Income down and ROE declined from above 20% to below 10%



European banks in the future


Future risks remain contained - BREXIT risks (e.g. CCPs located in London) in the short run cannot reverse this picture

Yet profitability continues to be under pressure

Banks face even stricter regulation which affects profitability negatively

  • Pillar 2 of Basel III bites (P2R & P2G)
  • Basel IV in effect from 2022, fully loaded in 2027, expected impact of additional 5ppts on CAD ratio
  • G-SIBs face 16% CAD ratio & 6% leverage ratio (18% & 6.75% in 2022)
  • EU Banking Union brings stricter provisioning rules on NPLs


Technology and new competitors bite on profitability

  • PSD2 puts pressure on fee income
  • Digital transformation brings competition from Fin Tech and need to invest in technology


A new environment of normalized (higher) interest rates would follow QE

  • History shows NII is relatively insulated, yet it falls in the first two years after rates go up, and only begins to rise afterwards
  • Loan losses rise, hence bank provisions increase and the cost of risk rises, which feeds into the economy



Greek banks in the future


Similar to the European challenges on profitability yet with an unusually large extra NPE burden

  • Until recently, target NPE reductions were not ambitious plus government’s sluggishness protected strategic defaulters
  • HFSF & BoG SPV schemes promise to reduce NPEs more quickly


Greek economy cannot recover in a sustainable manner unless banks recover, which means:

  • Cost of risk needs to come down
  • Demand for healthy lending and fees needs to rise
  • A tough stance on costs required
  • Technology to be espoused not only as a cost-reduction tool but for sales enhancement as well

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