Banks in Europe have been facing challenges on several fronts since the great financial crisis of 2008. The spreads that they earn between their borrowing costs and the rates at which they lend have been under pressure. At the same time, nonperforming loans have been mounting. These problems are compounded by the fact that the economies of several countries in Western Europe are growing very slowly. Unfortunately, there is nothing to indicate that a revival is possible in the near future. Stagnant economies, depressed interest spreads and mounting bad loans have resulted in Europe’s banks getting caught in a downward spiral from which they find it hard to escape.
The net-interest margins that banks earn across the European Union (EU) stand at an average of 1.2 percent. This compares poorly with the 3 percent that US banks earn and the average net-interest margin of 2 percent of Canadian banks. Banks already pay depositors near-zero interest rates and do not have any scope for lowering rates further. In fact, pushing effective rates down by levying fees on deposit accounts may prompt customers to pull out their money and put it into alternative forms of investment or simply hold cash. Nonperforming loans add to the banks’ woes. Just before the great financial crisis, the level of nonperforming loans was at approximately 1.5 percent of total loans. By 2013, this had risen to more than 5 percent. Defaults by borrowers continue to drag down bank profitability.
In addition to these challenges and that from the shadow-banking system, Western Europe’s banks also face competition from the growing number of financial-technology companies that are invading their turf, such as peer-to-peer lenders. New companies with web-based models and low overheads are taking away market share from incumbent banks in areas as diverse as wealth management and payment services.
Eastern Europe’s banks weathered the great financial crisis of 2008 reasonably well. But their balance sheets have seen significant changes since that time. Loan-to-deposit (LTD) ratios across the region fell 30 percent across the board in six years.
The Czech Republic’s banks are among the most conservative with an LTD ratio of only 77 percent. Slovakia’s ratio is also fairly low at 86 percent. But Poland had a ratio of more than 100 percent as of this year, indicating that its banks may need to adopt a greater degree of prudence in their lending policies.
Although Eastern Europe’s banks have seen a certain degree of deleveraging, some countries outside the region witnessed a greater reduction in their loan portfolios. In Ireland, the amount of credit as a proportion of the country’s gross domestic product (GDP) fell from 200 percent at the time of the great financial crisis to a little over 100 percent at the end of last year.
2008 saw a steep fall in oil prices. The Russian economy went into a tailspin as foreign hedge funds and retail investors withdrew money from the country. There was an 8-percent contraction in the country’s GDP in 2009. But a number of measures taken by the Central Bank of Russia (CBR), including deepening the domestic investment market, helped the country’s banks gain a certain degree of stability. In 2015, when oil prices fell again, CBR diverted a portion of the country’s dollar reserves to its banks to enable them to pay off external debt.
The Russian government is spending a sum equal to 3 percent of the nation’s GDP to recapitalise well-managed banks. It is also compensating individuals with savings in those banks that are unable to repay depositors. The recent past has seen a purge of Russia’s worst banks, many of which regularly participated in fraudulent transactions. In the last three years, 276 banks have been ordered to close by the CBR. Another 28 are the subject of a “financial rehabilitation programme” devised by the central bank.
The region’s banks face several challenges, not the least of which is managing their portfolios of impaired loans. At the end of 2014, about 7 percent of the loans on Polish banks’ books were impaired. The ratios in other countries were even worse, with Serbia’s banks registering an impaired loan ratio of 23 percent and Albania’s banks recording a similar ratio. The prospects for Eastern Europe’s banks appear to be mixed. A recent survey carried out by the European Investment Bank found that while 55 percent of bank owners in the region are planning to expand, about one-third of them say that they will reduce their levels of operations.
In both Western and Eastern Europe, banks will need strong leadership, continued prudence and dedication to innovation in order to strive in what would otherwise be an environment of low profitability.
>>>WESTERN EUROPE AWARD WINNERS
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Johan Thijs
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Handelsbanken (Sweden)
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>>>EASTERN EUROPE AWARD WINNERS
BANKING CEO OF THE YEAR
Eastern Europe
Umut Shayakhmetova
Halyk Bank (Kazakhstan)
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BEST CUSTOMER SERVICE
PROVIDER OF THE YEAR
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AIK Banka (Serbia)
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