Transforming European Banks

European banks can reduce costs by up to 40%

European banks can reduce costs by up to 40%
  • Blog post
  • November 16, 2021

Mark Batten, Dr. Philipp Wackerbeck, Dr. Torsten Eistert, Jeroen Crijns, Mahadeva Matt Mani, and Roderik van Houtert

Our proven three-tiered approach to achieve ambitious cost savings while making a bank future-proof from a growth perspective has been successful at major banks across Europe

Since 2007, European banks’ stock performance has lagged behind the largest stock-listed European corporates by around 80 percent. Furthermore, the gap between return on equity and cost of equity has been more than 2.5 percentage points wider for the last several years with a significant gap of 9.6 percentage points in 2020. This is due to significant topline and bottom-line pressure, which the Covid-19 pandemic has further increased. As a result, banks across Europe must substantially reduce their cost base to emerge stronger from the pandemic and achieve robust profitability in the post-Covid-19 era. Cost is one of the five major challenges banks must address, alongside credit, consolidation, tech, and ESG. More detail on our overall transformation approach and how to address all the key issues can be found here.

We have a proven strategic cost-transformation approach which has the potential to reduce a bank’s cost base by as much as 40 percent over four years, with most of the results delivered in the first three years. Simultaneously, this approach identifies differentiating capabilities to reposition the bank for future growth in a cost-effective manner.

We set out below the actions that banks must take to realize this goal, starting with a critical question: What kind of bank do you want to be?

As a first move to address their costs, banks must determine their strategic positioning in a market still afflicted by a host of issues that predate the pandemic. These include negative interest rates that continue to erode net income, increased regulatory burdens, and new challenger banks that are gaining market share. Even though we currently do not foresee a large wave of bankruptcies in central European economies post the imminent winding down of Covid-19 government support programs, banks still need to manage their way out of the pandemic.

The complexity and range of these challenges mean that defining the right strategic positioning is crucial before implementing a radical cost-transformation program aligned with the bank’s future direction. In addition, simply cutting costs will fail to boost returns in the longer term, and won’t work in areas such as investment in technology or people transformation. Banks must also work to reallocate scarce resources toward more profitable segments to improve their return on equity.  

Three parallel approaches

From this departure point, banks can evaluate their competitive position in relation to peers to develop a cost-effective operating model; identify business areas that require streamlining; and determine the size of the prize that the program is expected to deliver.

We recommend three parallel streams, which will deliver short, medium and long-term cost reductions over the course of the exercise.  

Three parallel approaches

Properly conceived and executed, a radical redesign of the operating model can deliver cumulative long-term run rate savings over a four-year period of 30-40 percent. By its nature, a transformational redesign will take time, because it will be disruptive and involve extensive organizational changes. Key strategic issues to consider include the overall offering and positioning of the bank from a product and client segment perspective; digitization and the introduction of new technologies such as AI, automation, and machine learning. Furthermore, the role of physical bank branches and real estate, especially following the shift to remote working during the pandemic needs to be considered.

There are also cumulative medium-term run rate savings to be achieved over a two- to three-year period of 15-30 percent by streamlining the existing operating model. Measures include rationalizing the product portfolio and right-sizing the workforce for the bank’s strategic positioning. Digitization will be essential for achieving a range of medium-term initiatives, from the elimination of complex, manual back-office processes and the rollout of online distribution channels, to zero-based budgeting (ZBB).

Meanwhile, some of the short-term tactical cost-cutting measures can yield benefits in a matter of weeks. Their overall cost impact is relatively modest, with projected cumulative run rate savings of 5-10 percent. However, these tactical measures are important, as they can free up resources to fund the ongoing program. Many of these decisions will be potentially unpopular, requiring clear communication and smooth execution in areas such as reclassifying discretionary versus essential expenditure; reducing reliance on multiple vendors; and re-weighting the balance between external consultants and employees. As Covid-19 lockdowns ease, banks will also have to review the cost implications of permitting staff to continue working from home.

It would be easy to wait for these short-term savings to appear on the balance sheet before starting the rest of the program, but banks must resist that temptation. Maximizing the benefits of a cost transformation program depends on initiating all three streams at once. This will allow gradual change, while moving toward the bank’s new target state and the associated cost-effective operating model.

Cost-effective operating model

It may seem equally appealing to make minor adjustments to an existing operating model, rather than undertake a radical redesign. The reality check for European banks is to look back at their weak results over the past decade. If the operating model had produced consistent strong profits, there would be no need for a root-and-branch overhaul.

Cost transformation case study: A leading Dutch global bank

The methodology we describe above has been tried and tested in our recent work with clients across Europe. One example is a leading Dutch bank that was facing rapidly changing customer preferences, increased regulatory pressure and declining margins. The bank wanted to consolidate its market position in digital products and services and improve its overall financial performance while significantly reducing their cost base.

We supported the bank throughout a three-year digital transformation program. Using our parallel, three-tier cost reduction approach, we engaged continuously with the internal team to link and align the execution of specific tasks with the overall program’s targets.

During the first six months we defined the transformation strategy and began to develop proofs of concept for a digital overhaul in areas such as payments, SME financing, and mortgages. Building on the lessons learnt, we then gradually scaled up the design phase to cover the other product categories, such as consumer loans, personal and business insurance, and savings.

By the start of the program’s third year, the bank’s entire digital storefront had been overhauled, and most digital products and services had been standardized across the business. In the last phase of the program, all designs were finalized, and shared services were reorganized. At the same time, we assisted the bank in executing agile implementation through the deployment of multi-disciplinary teams.

By the end of the program, more than 200 core banking processes had been fundamentally redesigned and implemented to leverage the full potential of digitization end-to-end across the bank. The program has improved operational efficiency, enabling more investments to boost top-line growth, and achieved an organization-wide shift towards customer centricity and digital banking, with employees more focused on client impact and financial performance. We facilitated rightsizing of the entire bank front-to-back and reduced the overall FTE base by ~25 percent and associated cost savings of 25-30 percent bank wide.  

Conclusion: The cost of not cutting costs

The major challenges facing Europe’s banks – including credit, cost, consolidation, ESG, and technology – are interconnected and none more so than cost; for without shrinking their cost base, banks will continue to struggle to achieve strategic and operational goals and long-term profitability.

Contact us

Mark Batten

Mark Batten

Partner, PwC United Kingdom

Dr. Philipp Wackerbeck

Dr. Philipp Wackerbeck

Partner, Strategy& Germany

Dr. Torsten Eistert

Dr. Torsten Eistert

Partner, Strategy& Germany

Jeroen Crijns

Jeroen Crijns

Partner, Strategy& Netherlands

Mahadeva Matt Mani

Mahadeva Matt Mani

Partner, Strategy& Netherlands

Roderik van Houtert

Roderik van Houtert

Partner, Strategy& Netherlands

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