One-third of Europe's banks are struggling to make money as IMF calls for urgent reforms to their business models

Jake Cordell
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Deutsche Bank was one of Europe's worst performing banks on profitability
Deutsche Bank was one of Europe's worst performing banks on profitability (Source: Getty)

European banks are set to be hit by a profitability crisis, according to the International Monetary Fund (IMF), as stock market volatility, negative interest rates and low growth have shattered the financial services industry’s ability to make money.

One-third of all Europe’s lenders - calculated by their share of total assets - are facing “significant challenges to attaining sustainable profitability without reform”, the IMF said today in its latest healthcheck of the world’s financial system.

“Policies are urgently needed to address long-standing structural issues … [which] include poorly adapted business models that continue to depress bank profitability and, particularly in the Eurozone, excess bank capacity and non-performing loans.”

Read more: Fitch warns on banking profits

Without action, the IMF warned that “financial soundness could become eroded to such an extent that both economic growth and financial stability are adversely affected”.

Deutsche Bank and Credit Suisse were up against the biggest challenges to their bottom lines, according to the IMF.

Of the UK-based banks, Lloyds and Royal Bank of Scotland (RBS) raised the most concerns for the IMF, though all of the major institutions except HSBC were struggling on at least two of the IMF’s five indicators of profitability.

The calculations

The IMF ranked the world’s biggest lenders according to 14 different fundamentals, including their capital buffers, proportion of non-performing loans and share price movement. Five related explicitly to banks’ profitability:

  • Return on equity

  • Return on assets

  • Net interest margin - the difference between interest given to savers and received from borrowers

  • Cost-to-revenue ratio

  • Profit-to-assets ratio

Researchers then divided them into groups depending on how they ranked against their competitors.

The results

Both Deutsche Bank and Credit Suisse were in the bottom 30 per cent of all banks for four of the five measures. The German investment bank had the worst return on assets, the second worst profit-to-assets and equity-to-assets ratios of 21 of the world’s largest banks.

RBS had the worst profit-to-assets ratio, and Standard Chartered was the only bank to deliver a negative return on equity over the last year, according to the IMF.

US lenders performed significantly better according to the IMF. Four - J.P. Morgan, Bank of America, Citigroup and Wells Fargo all reported a clean bill of health. Goldman Sachs was among the worst performing on just one profitability measure - net interest margin - and Morgan Stanley fell short on two - the net interest margin and its cost-to-revenue ratio.

The IMF warned that without a big step forward in the global recovery, the pressure on banks’ margins is likely to remain.

“Cyclical pressures have hurt the outlook for bank earnings generation. Low inflation and low growth act to reduce loan demand and therefore the outlook for future bank earnings.”

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