Bain study on the situation and prospects of the credit industry

Munich (ots) –

– After a good ten years of decline, credit institutions are able to increase their return on equity to 3.2% for the second consecutive time
– If banks do not react to this, there is a risk that their profitability will again fall significantly in the medium term due to inflation and recession
– A return of 7-9% is achievable in this turbulent environment in 2026 if institutions accelerate their transformation and optimize their business models
– Eight levers – from the expansion of ESG activity to the increased use of Web3 technologies – are in focus

A turbulent decade lurks behind German banks, shaped by the aftermath of the global financial crisis, euro turmoil, sustainably low interest rates and ongoing digitalization. Despite all the transformation efforts, the return on equity has continued to decline. On the other hand, it increased for the second consecutive time in 2021 – by 2.1 percentage points to 3.2%. In the study “German Banks 2022: In the Eye of the Storm”, the international management consultancy Bain & Company examines the recent upward trend, analyzes the possible effects of the economic slowdown, inflation and interest rate hikes on yields until 2026 and shows how banks can improve in terms of profitability can increase further.

Two factors in particular contributed to the recent increase in yields: a significantly lower provision for loan losses compared to the 2020 recession year and an increase in net fee income industry-wide by 17% to 38 .3 billion euros. Banks benefited from the dynamism of the securities business, the increased commercialization of third-party services and the abandonment of free banking services in the retail trade. “German credit institutions have reduced their traditional reliance on interest-bearing business sectors,” says Walter Sinn, director of Bain Germany and co-author of the study. “It’s a visible success of their transformation.”

The number of institutes and branches continues to decline

Progress has also been noted in the rationalization of the branch network and in the field of consolidation. In one year, the number of branches fell nearly 9% to 18,600 as many banks failed to reopen some of their branches after pandemic-related closures. The number of banks in Germany fell by a good 4% to just under 1,440. Other mergers took place, notably between credit unions and savings banks.

However, according to Bain’s analysis, the rally in yields could be short-lived. In the year 2022, a storm of high inflation, an economic slowdown, geopolitical tensions and continuously disrupted supply chains are brewing. Without countermeasures, banks are therefore threatened with a further decline in their return on equity over the next five years – from 1.6 to 1.7%. “The hoped-for positive effects of the interest rate recovery will not materialize at this time,” says Sebastian Thoben, partner and co-author of Bain. “While banks are already facing higher short-term funding costs, rising interest rates are only gradually impacting earnings.” Because many loans have a fixed long-term interest rate.

Threat of lower yields requires consistent action

However, banks are by no means helpless in this situation. Another calculation model in the study shows that interest and fee income increases and costs decrease significantly when banks act decisively. This includes accelerating transformation, further developing business models and using inorganic options. “If banks go all out over the next five years, returns of 7-9% are achievable,” says Thoben, an industry insider. This would allow institutions to recover their cost of capital (chart).

The Bain study lists eight levers that can be used to achieve this increase by 2026. On the revenue side, the focus is on the rapid expansion of ESG activity and Beyond Banking growth. Already today, the first institutes are increasingly gaining the loyalty of client companies with complementary services such as accounting services. Systematic syndication and securitization of corporate loans would also have a positive effect. According to Bain’s calculations, Germany’s big banks alone could make around four billion euros in higher net interest and fee income.

Automation and digitalization remain the keys to success

But above all, progress on the cost side is decisive for higher yields. Continuing and scaling up efficiency programs alone can increase return on equity by a good 2 to almost 3 percentage points. This requires, among other things, forced automation and digitization. The increased use of Web3 technologies such as blockchain or smart contracts offers additional savings potential. By using them in credit, leasing, asset services and cash management activities, for example, the costs of doing business with companies can be reduced by a good quarter. Double-digit percentage savings can also be achieved in other business areas.

With the modernization of their IT, German banks have created a good basis for using these technologies quickly and at all levels. From the perspective of Bain Germany boss Sinn, the next step must now be taken: “Banks should use new technologies even more consistently, open up new markets and break old habits.” Rationalization of the business and loan portfolio is inevitable in many places. The turbulent environment should not prevent banks from taking such measures. And he points out: “If banks get on board now, they will be among tomorrow’s winners – with higher profits, lower costs and a return at least to their cost of capital.

You can find the graphic here: https://ots.de/5RibSY

About the study

For the eighth time, Bain & Company assesses the balance sheet and income statement structures of German credit institutions, of which there were still nearly 1,440 in this country in 2021. The experts use time series from the Deutsche Bundesbank and the Bank European Central Bank (ECB) as well as Dun & Bradstreet and S&P Global databases. The structure of the groups of establishments is based on the classification of the Deutsche Bundesbank.

Bath & Company

Bain & Company is a leading international management consultancy that helps leaders in decision-making roles around the world shape the future. With our 64 offices in 39 countries, we are close to our client companies. We work with them to outperform the competition and set new standards in their respective industries. The partnerships of our ecosystem of digital innovators complement our expertise and ensure that we achieve better, faster and more sustainable results for our clients. Over the next ten years, we will invest more than US$1 billion in pro bono projects around the world. We support organizations that face today’s challenges in education, the environment and economic development and that are committed to equality in all respects. Since our founding in 1973, we have measured our success by the success of our client companies and are proud to have the highest referral rate in the consulting industry.

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Bath & Company
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Original content by: Bain & Company, transmitted by news aktuell
Original post: https://www.presseportal.de/pm/19104/5394153

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