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German, Japanese banks continue to lag in global efficiency ranking

Efficiency laggards in Germany and Japan are weighing down incremental progress among banks in improving the global cost-to-income trend, an analysis from S&P Global Market Intelligence shows.

Roughly two-thirds of the countries included in the analysis saw average cost-to-income ratios improve, leading the global ratio to fall for a fourth consecutive year to 52.93% from 55.33% in 2016.

The ratio, which measures operating expense as a percentage of operating income, is used to gauge efficiency and productivity for banks. Lower ratios generally indicate higher efficiency, but a number of factors can affect the metric, including a bank's business model and size. The economic, financial and regulatory environment of each country can also impact the ratios.

Germany's competitive banking industry had the worst weighted average cost-to-income ratio among the 64 countries included in the analysis, hitting 78.86% in 2017 following a 3.57-percentage-point year-over-year increase.

Deutsche Bank AG, the country's largest listed bank, recorded one of the world's highest ratios, at 92.93%. The group was previously hit by high litigation costs to settle legacy misconduct cases, the heftiest of which was concluded at the end of 2016. Deutsche also faced rising operating expenses since it launched a five-year restructuring plan in late 2015, as it aimed to revamp large parts of its IT infrastructure while also completing a merger of its retail banking units. The slumping performance of its corporate and investment bank, which still accounts for more than half of group revenues, has been the main drag on Deutsche's profitability over the past few years. The group posted a revised €735 million loss in 2017, its third consecutive annual loss.

Deutsche has readjusted its strategy to generate more stable revenue streams, focusing on retail banking, asset management and global transaction banking, while reducing the share of CIB. Resizing the CIB is expected to cut costs by €1 billion by the end of 2019 with the bulk of the reduction coming from job cuts.

Earlier in 2018, Deutsche announced plans to cut about 7,000 jobs as part of a review of its equities sales and trading business, and is facing shareholder pressure to downsize or altogether exit its U.S. business. The group expects that the rebalancing of the revenue mix and the headcount reduction, among other steps, will help it reduce its overall cost-to-income ratio. In the medium term, Deutsche is aiming for a ratio of below 65% at both its retail banking and asset management arms. It has not set a specific target for CIB.

Other German banks are facing their own challenges. Commerzbank AG, which is in the midst of its own restructuring, saw its cost-to-income ratio increase to 92.59% in 2017 from 79.24% a year earlier as it booked a 6.48% decline in operating income coupled with a 9.28% rise in expenses.

Similarly, banks in Japan, many of which are still struggling from years of ultralow interest rates and other local challenges, recorded deteriorating ratios for the third straight year, with the average rising another 5.15 percentage points in 2017 to 63.60%. Mizuho Financial Group Inc. had one of the highest cost-to-income ratios among major Asian banks, at 68.45%. The Japanese bank has posted a drop in its annual gross profit in each of the past four years — including an 8.48% decline in its most recent fiscal year — while its operating expenses have continued to tick higher.

Those performances come in stark contrast to the broader banking trend of incremental improvement in 2017.

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Click here for a PDF version of the map above.

Europe

Despite the German performance, much of Europe saw improvement during the year — and some countries markedly so. The average for banks in Belgium improved by 15.54 percentage points, while in the U.K. and Portugal it declined by more than 9 percentage points.

On the flip side, however, French banks saw their cost-to-income ratios worsen in 2017, with the average rising 7.54 percentage points to 74.41%. Among the country's major banks, both Société Générale SA and Groupe BPCE had 2017 ratios at or above 70%. The biggest annual deterioration in the region, however, came from Ukraine, where the average ratio shot 10.29 percentage points higher to 59.69%.

Asia-Pacific

Regionally, banks in 10 of the 16 Asia-Pacific countries in the sample experienced year-over-year improvement. South Korea posted the biggest drop in the average cost-to-income ratio, improving 8.48 percentage points to 54.35% to effectively reverse the deterioration seen in 2016. Vietnam-based banks also booked notable efficiency gains, with the average ratio improving 4.92 percentage points to 51.72%.

China continued to boost the region's lowest average cost-to-income ratio, despite seeing a 1.15-percentage-point increase in 2017. The 206 Chinese banks included in the sample had an average ratio of 33.58%, compared to 32.44% the previous year.

US and Canada

In the U.S., the average cost-to-income ratio improved to 60.45% from 61.20% year over year, while Canada's ticked down to 59.28% from 60.34%.
Among the region's 15 largest banks, Morgan Stanley had the highest cost-to-income ratio at 71.79%, while Capital One Financial Corp. had the lowest at 51.24%.

Latin America

Of the Latin American countries (along with Mexico) in the sample, all but two showed year-over-year improvement in their cost-to-income ratios — Peru and Colombia.

Banks in Venezuela, which is battling an economic crisis marked by hyperinflation, experienced the biggest improvement, dropping to 40.93% from 52.33%. However, there is a wide gap among the country's banks, with Banco Bicentenario del Pueblo de la Clase Obrera Mujer y Comunas Banco Univ CA posting a ratio of 79.13% for 2017, while Banco Occidental de Descuento Banco Universal C. A. had a 31.50% ratio.

Middle East and Africa

Some countries in the MEA region experienced large shifts in cost-to-income ratios in 2017. Most notably, Iraq, which in 2016 had one of the lowest ratios in the world, recorded one of the world's highest following a sample-leading 51.48-percentage-point increase to 74.38%. Algeria also saw a sizable jump of nearly 21 percentage points to 45.61%.

Still, most of the 14 countries included in the sample improved their ratios, including Sudan and Angola, where the average ratio declined by roughly 13 percentage points.

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Click here to download a template providing aggregate profitability, capital and asset quality ratios by geography. Click here to find the cost-to-income ratios of select banks for the first quarter of 2018. Enjoyed this analysis? Click here to set up real-time alerts for data-driven articles for a particular region.