Finding success with BAWAG Group’s European retail banking roadmap

We reside in one of the crucial dynamic and transformative intervals of banking. The subsequent decade will result in fast change as the standard banking mannequin is challenged by new and evolving expertise and shifting buyer behaviour. The future ensures just one factor: change. Banks that fail to deal with these altering currents will discover themselves unable to compete.

On the floor, the scenario immediately for European lenders doesn’t look promising. Negative rates of interest, decrease margins, a number of restructurings and anaemic progress all have a tendency to color a somewhat difficult image of the whole banking business. These elements are significantly pronounced in mainland Europe, a area with an unlimited variety of lenders of all sizes and styles – by all measures, a area that’s overbanked and seemingly unable to consolidate for a wide range of causes.

Customers don’t care about an organization’s inner processes – they need the most straightforward, straightforward to make use of and simple to grasp services and products at a good value

Since 2007, each the EURO STOXX Banks Index (which represents publicly listed eurozone banks) and the STOXX Europe 600 Banks Index (which represents listed pan-European banks, together with these exterior the eurozone) have decreased by greater than 70 p.c. According to the European Central Bank (ECB), the typical return on fairness of eurozone banks in 2018 was round six p.c, with a cost-to-income ratio of 66 p.c.

Focusing on damaging charges or the structural variations between Europe and different areas associated to bond yields, capital markets or the shortage of a banking union is just not with out advantage. In our view, nevertheless, this isn’t the best wrongdoer inflicting the banks’ struggles. Financial establishments must embrace simplification, leverage expertise and have a eager deal with effectivity to rework their enterprise fashions for the higher.

Keeping issues easy
Despite the aforementioned all-too-familiar challenges, at BAWAG Group, we see many alternatives throughout the European banking panorama. In order to reap the benefits of these, banks’ administration groups ought to foster a transparent dedication to simplification and effectivity. Defining core competencies, being laser-focused on a handful of core services and products, and simplifying end-to-end processes throughout the organisation are key to driving effectivity all through an organization (be it at a financial institution or every other agency).

Consumers are more and more searching for the most straightforward, simple and simple to make use of banking merchandise that supply 24/7 connectivity. Providing a simple and simplified product providing requires easy and streamlined end-to-end processes, whether or not the product entails mortgages, shopper loans, leases, bank cards or present accounts. At the tip of the day, prospects don’t care about an organization’s inner processes – they need the most straightforward, straightforward to make use of and simple to grasp services and products at a good value.

This will finally drive banks to grow to be extra environment friendly, which is a key aggressive differentiator. Companies nonetheless discuss expertise by means of the standard lens of IT, referring to it as a siloed operate that’s distant from the remainder of their operations. Banks ought to take a special view, very a lot putting expertise on the coronary heart of each side of their enterprise. This consists of engagement with prospects by means of cell purposes, e-banking, on-line funds, advisory providers, underwriting, mortgage processing and customer support centres – all the pieces must be underpinned by expertise.

Retail banking is turning into extra commoditised in the way in which that it allows monetary establishments to actually profit from expertise to create seamless processes. Our personal expertise at BAWAG Group required us to grasp our end-to-end processes earlier than remodeling the organisation. In doing so, we had been in a position to cut back the quantity of complexity inside our product choices and providers, which, in flip, simplified our center and back-office features. However, embracing this deal with simplification required buy-in throughout the organisation, turning into data-driven in our decision-making and empowering staff to be brokers of change. Ultimately, the tradition of simplification and constant enchancment took maintain and have become ingrained in how our organisation operates.

Sound fundamentals
If we zoom in to deal with a selected core European market, the scenario for banks within the DACH (Germany, Austria and Switzerland) area seems significantly fascinating: the typical return on fairness for German banks is 2.four p.c (see Fig 1); Austria is without doubt one of the most densely banked international locations in Europe; and Switzerland’s banking sector is recognised the world over for its stability.

The area is at instances mischaracterised as being unprofitable for banking. A great deal of the below-average profitability within the area could be attributed to very excessive price buildings and, to a sure diploma, a fragmented banking market. We see each as alternatives, when it comes to making use of an industrialised method to banking and presenting ample alternatives for consolidation. More importantly, our view is basically knowledgeable by the very sturdy macroeconomic backdrop of the area.

The DACH area is dwelling to greater than 100 million individuals – roughly one third the scale of the US market. According to the OECD, the regional GDP progress charge is roughly one to 2 p.c – Austria is the front-runner right here, recording GDP progress of two.7 p.c in 2018 and 1.eight p.c in 2019. Unemployment within the DACH area, in the meantime, lies between a wholesome three and 4 p.c.

All three international locations have sturdy fiscal positions, with a comparatively small debt-to-GDP ratio and low ranges of each shopper indebtedness and homeownership in comparison with Anglo-Saxon international locations. These are all nice macro elements from a retail banking standpoint and will translate to a decrease price of fairness given the soundness and low volatility of the area. With a robust macro backdrop, secure authorized methods and regulatory environments, and low ranges of shopper indebtedness augmented by sturdy threat administration, conservative underwriting and an industrial method to banking, we imagine this to be a formulation for success in retail banking throughout the area.

Focusing on issues you may management
Every enterprise has to deal with fixed change and disruption, whether or not it’s a financial institution, a producing firm, a expertise agency or a cutting-edge start-up. However, if organisations select their merchandise, channels and markets with an absolute deal with buyer wants, and drive simplification and effectivity throughout the organisation, this could create a formulation for success in any business, together with retail banking.

In 2007, our financial institution was loss-making and undercapitalised with a basically damaged enterprise mannequin. The financial institution was bought in an administration course of to an investor consortium led by personal fairness agency Cerberus Capital Management. More than 12 years later, our financial institution is now a publicly listed firm on the Vienna Stock Exchange. It executed the most important preliminary public providing in Austrian historical past in 2017, and immediately ranks within the prime tier of European banks when it comes to profitability and effectivity, delivering a pre-tax revenue of €573m ($630.2m), a return on tangible widespread fairness (ROTCE) of 14.2 p.c and a cost-to-income ratio of roughly 44 p.c for 2018.

In phrases of capital era and returns, we goal an annual dividend payout of 50 p.c of the web revenue attributable to shareholders and can deploy further extra capital to spend money on natural progress and pursue earnings-accretive mergers and acquisitions at returns constant with our group ROTCE targets. This all comes on account of specializing in the issues we are able to management and actually impression.

For the primary three quarters of 2019, we reported a robust revenue earlier than tax of €451m ($496.1m) and a web revenue of €343m ($377.3m), each up 5 p.c on the earlier yr. The enhance was primarily pushed by increased working . The financial institution delivered an ROTCE of 14.2 p.c, a cost-to-income ratio of 42.7 p.c and a Tier 1 widespread capital (CET1) ratio of 15.7 p.c. Additionally, we acquired approval from the ECB for our share buyback programme of as much as €400m ($440m), which we executed for the complete quantity in This autumn 2019. Accounting for this and the year-to-date dividend accrual, the professional forma ROTCE was 17.7 p.c for the primary three quarters of 2019, with a professional forma CET1 ratio of 13 p.c.

As nicely as making progress in our strategic capital actions, we proceed to execute numerous operational initiatives. In truth, we’re on monitor to ship on all of our targets in 2019 and proceed to adapt to a altering working surroundings. While the marketplace for European banking continues to be difficult, our fundamentals at BAWAG Group stay sturdy. We will deal with the issues that we management, driving operational excellence and persevering with to pursue disciplined and worthwhile progress.