A new study of the 50 largest banking groups in the UK and Europe calls for disruptive management strategies to reverse lacklustre profitability across the industry, warning that Return on Equity (RoE) and Common Equity Tier 1 (CET1) ratios are in danger of falling below the average market and regulatory minimum over the next five years.

The European Banking Study (EBS), launched today by zeb, one of the leading global financial management consultancies, shows that European banks are lagging behind their international counterparts in profitability and operational efficiency. It goes on to predict four major trends that will dominate the European banking scene from now until 2021 in response to the current unhealthy state of the industry.

“Profitability has become the critical concern for the European banking industry,” said Bertrand Lavayssière, Managing Director UK, zeb.  “Actual organic profitability of Europe’s top 50 banks has declined significantly since 2012, and their average RoE has fallen to a level that is about half of what shareholders should expect based on a standard cost of equity calculation.

“And with Brexit looming ever-closer, it’s set to be an even bumpier road ahead. Although the top 50 European banks have strengthened their capital positions with a CET1 ratio of 13.5% in 2016, upcoming regulation and a continuation of the relatively low yield environment will increase the burden on these banks. If banks do not employ disruptive strategies to reverse their own fortunes, they risk becoming targets for acquisition.  Without taking decisive action quickly, banks’ profitability and financial strength could deteriorate further by the end of the decade – we could see, in a baseline scenario, RoE fall to 1.5% and CET1 ratios below the average market and regulatory minimum.”

The zeb European Banking Study includes:

• A detailed study of Europe’s top 50 largest banking groups, with performance comparison to other global markets including US, Chinese and Australian banks
• Expert analysis of the factors affecting the industry and dissection of the figures showing increased profitability of banks in 2016
• Projections by zeb on what the next five years hold for global banks, including identification of four major trends that will dominate the European banking scene from now until 2021 in response to the current unhealthy situation of the industry
• Recommendations for what is required from European banks if they are to prosper, including major changes needed, both in terms of more stringent re-evaluation of their business models and the need for more innovative approaches