S&P: Europe’s banks “aren’t dinosaurs yet,” conference panelists say
Banks may have to turn technology and crypto challenges into opportunities if they are to prosper in a fast-changing financial landscape. Without opening new business lines or effecting other structural change, the sector’s profitability will remain tepid. That’s according to participants at S&P Global Ratings’ recent European Financial Institutions Virtual Conference. A link to the conference replay is available below.
“Now that European banks have regained their footing after a very tough decade, the question is where will they go from here?,” said S&P Global Ratings credit analyst Osman Sattar.
We posed this “fly or flounder” question to the speakers and panelists at our 6 October conference. Participants included top regulatory experts as well as industry representatives and S&P Global Ratings credit analysts.
Banks held firm during the Covid-19 shock, a testament to their efforts to rebuild their balance sheets and to the significant enhancements in bank regulation since the global financial crisis. The extent of fiscal support provided by governments to households and businesses also helped.
Nonetheless, the outlook is burdened by limited prospects for higher net interest margins, and competitive pressure from non-banks underscoring the importance of continuing investment in digitalization. Some banks argue that potential higher capital requirements from the completion of Basel III could eat into already thin returns and put the region’s financial sector at a disadvantage to global peers.
Keynote speaker Carolyn Rogers, secretary general of the Basel Committee on Banking Supervision, rejected assertions that prudential regulation was handicapping banks. Capital requirements applied equally across the board, she said, and had created a level playing field and improved resilience.
The banking sector has already faced disruption from digitalization and, increasingly, from blockchain technology. Added to this is the fact that central banks would have the possibility to cut out commercial banks as intermediaries, if and when central bank digital currencies (CBDCs) are rolled out.
“If central banks open and manage all the CBDC accounts themselves then banks will lose their raison d’etre and at least some of their deposits,” said Mohamed Damak, a credit analyst at S&P Global Ratings. “That would profoundly impact their intermediation function.”
Dr. Damak still believes that Central Banks are leaning towards a model where banks will have a role to play. By embracing blockchain technology and the concept of ‘disrupt yourself or get disrupted,’ banks could create new growth opportunities and reduce credit costs.
The greater risk is that Europe’s policymakers and banks put their heads in the sand, refusing to acknowledge these realities. The audience shared this view. A solid third of polling respondents said European banks are less prepared for a crypto revolution than their Asian counterparts.
Despite many challenges, more than half of conference-goers said they were “cautiously optimistic” about the outlook for Europe’s banks. Only 1% polled as saying Europe’s banks are already dinosaurs.
The conference replay and additional material is available (until the end of the year) at the link below:
This report does not constitute a rating action.
