EU banks have managed to reduce their operational cost base only marginally despite the good progress they have made in lowering their branch and headcounts since 2008, according to DBRS.
Inflation-adjusted operating costs went down by just 5% between 2008 and 2015, while the average reduction in the number of branches was 17% across the European banking sectors and the number of employees fell by 13% over the same period.
Costs have remained "stubbornly high" as the changing regulatory landscape and customer needs have pushed banks to spend more on conduct-related and compliance control issues, on restructuring programs and on IT and the development of their digital capabilities.
The reasons for branch network optimization differ from country to country. Spain has closed the largest number of branches — 15,000, or 45% of all existing outlets — as part of wider reforms made to compensate for state aid, whereas digitization was the main driver in Denmark and the Netherlands, which shut down the largest proportion of branches since 2008, at nearly 50%.
Whatever the reason, the effect is the same in all regions as there are continued cost pressures on banks and a notable improvement in cost efficiency does not seem likely in the near term, according to DBRS. Even though many banks have run digital transformation programs, it would take a while before the positive effects are felt in their cost base, it added. Furthermore, a number of credit institutions are still waiting for their customers to actually migrate to entirely digital solutions.
Lenders across Europe are bound to continue to improve location and personnel costs, but in some countries, there is little room left for a further reduction in branch networks. In Germany, for example, the relatively high fragmentation of the banking market is a key obstacle to a greater consolidation and is impairing branch and cost optimization as a result. Portugal's fairly concentrated banking system also makes a significant further consolidation in the sector very unlikely, DBRS said.
Therefore, banks in such markets are expected to explore alternative options of optimizing costs by cutting administrative expenses, changing their remuneration models, improving IT infrastructure and similar measures, the agency said.
In France and Italy, banks are still focused on downsizing their distribution networks. French banks have a strong incentive to shut down more retail locations as their profitability has been hurt by low interest rates and home loan renegotiations, according to DBRS.
In Italy, medium-sized and small banks are gradually joining in the ongoing cost restructuring trend among larger lenders. Based on announced strategic plans, local credit institutions aim to achieve a 17% reduction in the number of branches and an 11% cut in personnel by 2020.