challenges for the european banks

Challenges for the European banking industry

Conference “European Banking

Industry: what’s next?”

University of Navarra, 7 July 2016

Vítor Constâncio ECB Vice-President

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www.ecb.europa.eu ©

Outline

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» Introduction » Banks under siege: general challenges

» FinTech threat of unbundling banks » Uncertainty in the finalisation of the regulatory agenda » Low interest rate environment » Regulation of shadow banking and the boundary problem

» The “Alchemy of banks”, the financial crises and structural reform proposals

» European banking sector: facts and challenges » Low profitability » Non-performing loans » Overcapacity in the banking sector » Prospects for bank consolidation

» Response by the banks » Conclusion

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www.ecb.europa.eu © 3

Chart 1: The growth of the non-bank financial sector has gathered pace in recent years, coupled with a shift towards market-based financing

Sources: ECB and ECB calculations. Note: MMFs refer to Money Market Funds. ICPFs refer to Insurance Corporations and Pension Funds. Other financial institutions (OFIs) refers to non-monetary financial corporations excluding ICPFs. Non-money market investment funds (non-MMF IFs) and financial vehicle corporations (FVCs) are included in the OFI sector.

Euro area total financial sector assets (Q1 1999 - Q4 2015; EUR trillions)

Sources: Eurostat, ECB, Dealogic and ECB calculations. Note: Loans from monetary financial institutions to non-financial corporations are corrected for loan sales and securitisations, while loans from non-monetary financial institutions exclude loan securitisations.

External financing of euro area non-financial corporations (Q1 2000 – Q1 2016; EUR billions; four-quarter moving flows)

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OFIs (incl. IFs, FVCs): 39%

ICPFs: 13.5%

MMFs: 1.5%

Credit institutions: 46%

credit institutionsOFIs (incl. IFs, FVCs)

ICPFsMMFs

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total loans from monetary financial institutionsnet issuance of debt securitiesnet issuance of quoted sharesloans from non-monetary financial institutions

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Chart 2: Estimates of the equilibrium real rate compared to the market real rate

Source: ECB calculations, and San Francisco FED. Notes: The semi-structural model is very much aligned with the approach of Messonnier and Renne (2007). The BVAR is a bayesian vector auto regression with minimal restriction that forecasts a five-year ahead forecast of the short-term real interest rate. The inflation-stabilizing real rate is the real interest rate that would be required to stabilise inflation in the euro area at below but close to 2% over the medium-term. It is based on the model by Christiano, Motto and Rostagno (2014). For the US, the natural real rate is based on the publically available data series from the model by Laubach and Williams (2003). Latest observation: 2016 Q1 for the euro are estimates and 2015Q4 for the US.

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Laubach and Williams - US natural interest rate

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Euro area banks’ return on equity (2009-Q1 2016; percentages; 10th and 90th percentiles, interquartile range and median)

Source: SNL Financial. Notes: Based on publicly available data on significant banking groups. Annual and quarterly data are based on a sample of 81 and 49 SBGs respectively.

Chart 3: Bank profitability moderately improved in 2015 and net interest income proved resilient

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median for significant banking groups

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Sources: Bloomberg, Datastream, Consensus Economics, ECB calculations. Notes: COE is the expected return on the EuroSTOXX Banks index, estimated by applying the CAPM to the EuroSTOXX market index with one-year rolling betas. Estimates of the equity premium are based on I/B/E/S earnings forecasts and Consensus estimates of long term real GDP growth. Return on equity (ROE) is the trailing weighted average (by mkt cap) of individual ROEs. Latest observations are for Q1 2016 (ROE) and Q2 2016 (COE).

Return on equity and cost of equity and for listed euro area banks (Q1 2000 – Q2 2016; percentages)

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COEROE

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Chart 4: Deterioration in market sentiment largely reflected a re-evaluation of banks’ profitability prospects

Sources: Bloomberg and ECB.

Bank equity indices for key regions (1 Jun. 2015 - 5 Jul. 2016, daily data)

Sources: Bloomberg, Datastream and ECB.

Banks’ price-to-book ratios in key regions (1 Jan. 2015 - 1 Jul. 2016, weekly data)

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Jun-2015 Aug-2015 Oct-2015 Dec-2015 Feb-2016 Apr-2016 Jun-2016

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Nikkei 500 BanksEurostoxx Banks

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Chart 5: Scope for efficiency gains in the banking sector B

Market concentration and efficiency ratio in euro area countries x-axis: Herfindhal index; y-axis: cost-to-income ratio

Source: ECB.

Change in the number of bank branches/employees versus the change in cost-to-income ratio in euro area countries 2009-2014; percentage changes (x-axis); percentage point changes y-axis

Sources: ECB and ECB calculations.

Branch network rationalisation and headcount reductions brought efficiency gains in some, but not most, euro area banking sectors

Low market concentration and higher cost inefficiency suggest there is scope for efficiency gains from consolidation

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change in the number of branches (blue) and employees (yellow)

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Chart 6: Banks’ adjustment to new business models

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Chart 7: Market concentration has increased since the crisis but cross-country differences remain significant

Source: EU structural financial indicators.

Market concentration in the euro area/EU banking system (2005-2014; share of 5 largest CIs; Herfindahl index)

Source: EU structural financial indicators. Note: Horizontal line represents market concentration in the euro area in 2014.

Market concentration in euro area countries (2008-2014; Herfindahl index)

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EA-share of the 5 largest CIs in total assets (left-hand scale)EU-share of the 5 largest CIs in total assets (left-hand scale)EA-Herfindahl index (right-hand scale)EU-Herfindahl index (right-hand scale)

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Chart 8: M&A activity in the EU banking sector has declined since the high values recorded in 2007

Source: Dealogic M&A Analytics. Notes: M&As include both controlling and minority stakes. The value of some of the transactions is not reported. “Cross-border” M&As refer to intra-euro area transactions involving a non-domestic acquirer. “Inward” refers to M&As by non-EU or non-euro area EU banks in the euro area and “outward” indicates M&As carried out by euro area banks outside the euro area.

Bank M&As – number of transactions (2000 - 2015)

Bank M&As – value of transactions (2000 - 2015; EUR billions)

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challenges for the european banks

Economy & Finance