EUROPEAN AND UK BANKS AFTER COVID-19: CHALLENGES AHEAD ON ASSET QUALITY, DIGITAL TRANSFORMATION AND PROFITABILITY

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Overview

  • Capitalisation efforts materialised during 2018 and 2019, following the consistent implementation of regulatory reforms e.g. Banking Recovery and Resolution Directive (BRRD), allowed European and UK banks to face the first stage of the Covid-19 pandemic with relatively high capitalised balance sheets. For EU and UK banks, the Tier 1 ratio (fully loaded) stood at 15.0% and 15.7%, respectively for 4Q19.
  • The improved trend of asset quality observed mostly from 2H19 following significant efforts to reduce NPL (Non-Performing-Loans), stopped in 1H20 showing an immediate increase in NPL for EU banks, from 2.7% in 4Q19 to 3.0% in 1Q20. In 4Q20 we observe signs of stabilisation, however we still expect further deterioration following the expiration of support measures put in place by governments in early 2020.
  • Business models of traditional banks, with large branches coverage, as well as those with a low level of digitalisation and operational efficiencies, suffered a material change in business operations. We expect the trend towards digitalisation to increase even further following the changes in the way clients interact with banking services.
  • Cost reduction and profitability are still under significant pressure, due to the extensive low interest rate environment, the increase in loan loss provisions and the costs related to the digital transformation and operational challenges faced during the first stage of theCovid-19 pandemic, with business models facing a major shift to online and remote contact, never seen in modern times.

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EUROPEAN AND UK BANKS AFTER COVID-19: CHALLENGES AHEAD ON ASSET QUALITY, DIGITAL TRANSFORMATION AND PROFITABILITY

16 Jul 2021

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