However, without structural changes such as progress on the Banking Union, including the European Deposit Insurance Scheme, cross-border M&A is likely to remain low. Even if these structural impediments are addressed, any bank looking to grow (or shrink) inorganically still needs to think carefully about how it can do so in a value-accretive way. How do you grow through acquisition without destroying value? How can you exit businesses without retaining the costs of underlying systems?
With consolidation only foreseeable in the longer-term, in 2020, the focus of banks’ efforts to improve profitability will be on cost reduction. In fact, without revenue growth, European banks will need to cut almost one-fourth of their cost base to achieve the industry’s typical ROE target of 12%. Achieving this will require firms to look beyond traditional cost-cutting approaches to radical transformation that includes extensive use of managed services, or industry utilities, to take on critical but non-core activities in a more cost-effective manner. Scaling back and reconfiguring branch networks is also required, alongside increased automation, simplification of products, services, and underlying processes and use of partnerships to build scale. With such challenging fundamentals, the difficulty for banks will be deciding how to free up capital to invest in this transformational agenda.
US war for talent amid technology transformation
In the US, the banking sector continues to deliver double-digit returns, putting US banks in a comparative position of strength. A bounce back in financial markets drove record performances for a number of institutions in FY19, but can this be maintained? While at the beginning of 2020 US market fundamentals remained positive, with consumer confidence — the core driver of the US economy — robust as business confidence declined the market is now entered a period of uncertainty and decline (see Figure 3).