What can banks expect if they successfully undertake this transformation?
The goal must be to close the gap between returns and the cost of capital. In the short term, this means managing the risks associated with an uneven economic recovery on the loan book. That requires a more flexible approach to adjust how loans are originated and held, moving toward a more “asset light” model.
Banks must also undertake a radical review of their cost structure in a transformation that will affect every aspect of the bank. Cutting costs and improving returns would free up funds to make the investments in the technology needed to compete with BigTech and FinTech competitors, and meet customers’ new expectations when it comes to convenient and secure digital banking.
The ECB’s new guide has already encouraged domestic mergers in Italy and Spain, and banks should be actively considering cross-border transactions where scale or added capabilities offer a clear competitive advantage. Other banks may seek strategic alliances with rivals that have similar business models to combine them on a single platform, or pursue partial mergers.
ESG considerations must also be an integral part of any radical bank transformation. This is not just about meeting legal requirements and becoming carbon neutral, but rather understanding ESG as an opportunity to enhance reputation, de-risk loan portfolios, increase engagement with stakeholders and attract talent.
Real change necessarily involves rethinking the entire business model, which will lead to a massive transformation within the workforce, in terms of working models and the skillsets required. The sooner eurozone banks begin their transformation, the sooner they can close their long-standing performance gap.
