More than a quarter of European banks are at high risk from failing and need to take urgent action to survive, according to Bain & Company.

In a report published Sept. 4, the consultancy said while lenders appear to have rebounded when taking into account higher capital requirements following the financial crisis, many are still grappling with weak balance sheets, are struggling to be profitable and need to rethink their business model to remain competitive.

However, banks prepared to carry out the hard work to turn themselves around can return to good health, Bain said.

'The path of disappearance'

The situation of some banks has not changed since the crisis, which means they have to take severe action to survive, according to the report's author, Bain partner João Soares.

"Something has got to give — either they get their act together and restore health and grow sustainably, or they will follow the path of disappearance through liquidation, merger, resolution," Soares told S&P Global Market Intelligence.

The report — whose projections are based on data from balance sheets and income statements — said a total of 28% of banks represented a high risk, up from 26% in 2013, with the majority of at-risk lenders based in Italy, Greece, Portugal and Spain.

While Italy, Greece and Portugal were the most badly affected, Spanish banks, too, needed to take heed of potential risk, Soares said. "There is still a lot of concentration in that weaker balance sheet/highest concern border that we are particularly careful about," he added.

The countries in question have restructured their banking sectors but are still grappling with legacy bad debt. While Spain has been one of the most successful countries in turning its banking sector around, its sixth largest bank, Banco Popular Español SA, was acquired in a fire-sale by Banco Santander SA after being deemed failing by European authorities.

The Bain report also said that 17% of European banks need to fix weak balance sheets, compared to 21% in 2013, and that lenders demonstrated vulnerabilities that were not yet fully reflected in their profit and loss statements.

Some 17% of lenders suffer from weak business models, with a number of British and German banks unable to find a viable business model. According to the report, virtually all the large German lenders fall into this category, with profitability and efficiency comparable to their Greek counterparts.

"We find the British banks to have very robust balance sheets, but they are currently having a business-model turnaround problem, and the same is true for the vast majority of the German banks," Soares said. "They need to find the business models … they haven't cracked the code yet."

Scandinavian, Belgian and Dutch lenders outperforming

However, the report said that 38% of banks have attained a strong position, with Scandinavian, Belgian and Dutch lenders outperforming on virtually all financial indicators.

The banks in question were either in countries that did not suffer a banking crisis, such as the Nordics, or they endeavored to sort out their balance sheets and improve profitability in a short space of time.

"If I compare banks that we measured 10 years ago … one of the key differences is that you can actually tell which banks took action and which did not," Soares said. "Profit pools have changed in the industry. If you kept doing what you were doing before, for example commercial real estate or shipping or some segments that might have been attractive in the past ... if you didn't change … you stood to lose ground."

Investors were rewarding success with an average price-to-book ratio of 1.31, meaning that the banks' share price values the assets at 1.31 times their net assets, while the riskiest banks were punished with a price-to-book ratio of 0.31. Lenders with weak balance sheets had a 0.72 price-to-book ratio on the equity markets, while banks with challenging profitability and efficiency had a ratio of 0.60.

Successful banks had succeeded by drastically reducing their problem loans, changing their funding mix by decreasing their dependency on wholesale funding, dramatically cutting costs, recapitalizing and by focusing on digitization, according to the report.