Kearney has released the sixteenth edition of its annual European Retail Banking Radar, which tracks the performance of close to 90 retail banks across 21 European markets.
The study found that higher interest rates fuelled a record year for retail banks.
However, it also warned that banks should be leveraging their current financial position to prepare to navigate growing economic headwinds.
Record year for banks in 2023
2023 was an exceptional year for retail banking revenue, efficiency and profitability, with the income of the banks covered by the Radar reaching €365 billion in 2023, an 18% increase on 2022.
Net interest income grew 23.5% in 2023, while net commission income only grew 1.5%
Income per client and income per employee also grew to €830 (2022: €686), and €356,000 (2022: €301,000) respectively.
The increase in income meant that the cost-income ratio for most banks was vastly improved at an average of 53%, dropping from 60% in 2022.
As a result, profit per customer jumped 45% from an average of €233 in 2022 to €337 in 2023.
Selected countries, such as Italy, Slovenia and Poland more than doubled the profitability per client in the course of one year.
Profits must be used to prepare for future challenges
The study found that while the cost base did not grow as fast as income in 2023, the increase of 5.2% still meant a €10 billion growth in costs for the banks covered by the Radar. This is the largest increase in 16 years.
Saving and lending were also affected by inflation and interest rate hikes. Client deposits only rose by 0.5% in 2023, compared to a historical average of 2 – 4% per year. Lending growth followed a similar pattern, averaging only 0.7% growth for the year.
UK banks vulnerable to falling interest rates
With higher interest rates also leading to increased risk costs going forward, banks will need to leverage their strong financial position now to make their business and operating models future-proof and regenerative.
The growth in retail banking this year was almost completely driven by an increase in the net interest income, propelled by higher interest rates.
As interest rates start to decline, banks that rely on lending are likely to face more pressure on their income line.
With a net interest to total income ratio of 90% in 2023, UK banks are most likely to feel the effect of falling interest rates strongly.
“This year marks the second record year for the profitability of retail banks in Europe, with higher interest rates driving staggering income,” Roberto Freddi, Partner at Kearney.
“However, banks should be prepared for the fact that while net interest income is likely to fall, operational and risk costs will not follow suit. European banks should be looking to plan for the long-term but act in the short term.”
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