While European bank share prices have recovered from the lows of 2008 - outperforming US lenders since the start of the year - the average return on capital of 4.4 per cent remains well below the minimum expected rate of return.
Looking at the progress Europe’s banks have made in response to the eurozone debt crisis in the last decade; Oliver Wyman, the global risk manager noted that there are large geographic differences in how well the banks have fared with the enormous task of debt restructuring.
Banks in some European markets have completed this restructuring process, whilst other markets continue to struggle as bank balance sheets remain burdened by non-performing loans.
Whatever their progress on the restructuring agenda, all of Europe’s banks now find themselves having to deal with a rapidly changing environment, according to the risk specialist.
New customer preferences, digital interfaces and platform businesses are changing how customers bank - a trend that will be accelerated by regulators’ push for open banking.
At the same time, automation and data tools are creating the opportunity and imperative to significantly cut cost bases.
“Europe’s banks have spent the last nine years working hard to recover from the financial crisis, repairing their balance sheets, making the changes demanded by new regulations and exiting structurally unprofitable businesses, all in a low growth context,” said Lindsey Naylor, partner at Oliver Wyman.
“There is a strong possibility that Europe’s banks will emerge from the crisis only to see a whole new set of challenges that may require changes to the banking business model itself.
"The new agenda will demand innovative answers beyond the restructuring that has taken place so far”.
In a client note, the risk specialist made four salient points about Eurozone's lenders.
First off, they have been forced to increase capital and shrink balance sheets, resulting in average core equity tier one capital ratios increasing from 3.7 to 5.8 per cent.
Further work is now in train on MiFID II, Brexit, and recovery and resolution planning.
Second, good progress has been made on exiting unprofitable businesses, both from a business line and a geographic perspective, as banks have moved away from non-core markets.
Oliver Wyman has estimated that in wholesale banking, European banks have exited lines of business that generated annual revenue of €10 billion in 2009.
Third, waves of cost savings programs have been announced to increase operational efficiency, although it must be said results are patchy, according to the consultant.
Nominal bank expenditure grew at 1 per cent year from 2008 to 2016 and cost-to-income ratios barely moved, as revenues shrank in the same timeframe due to low interest rate environment and squeezed margins.
Lastly, while some European markets have been transformed by a consolidation wave, others have barely moved in this period. Greece and Spain have seen concentration double since the crisis and Italy has seen significant activity over the past year. Cross-border consolidation remains limited.
Still worried about the massive volume of bad loans, Europe’s central bank has published proposals on provision requirements for loans which turn sour from January 201,
Broadly, the proposals require that banks set aside reserves of 100 per cent of unsecured non-performing loans within two years and on secured lending within seven years.