European banks could save EUR 40 billion through a new wave of cost cuts
Munich/Paris, July 23, 2012
European banks are shifting from cost reduction to cost transformation, and in turn are facing a much more challenging environment. In their report entitled "Cost transformation imperative for European banks", Roland Berger's experts find that banks are targeting short-term cost improvements and long-term simplification to restore profitability. In addition, they are diversifying and adapting their business models/portfolios in light of new regulatory constraints.
Banks will have to decrease their cost bases by at least 10% over the next five years (EUR 40 billion in cuts) to achieve a 55% cost-to-income ratio by 2016, assuming a flat revenue growth environment. Roland Berger's experts predict that if the banking environment deteriorates, cost reductions of 17% (EUR 68 billion) could be required. Half of the total targeted reductions will be made in HR costs and the other half in external costs (IT, real estate and other costs).
Many European banks have announced cost-cutting programs. However, Roland Berger's analysis reveals that among the top 25, only one third have an ambitious cost transformation plan. But cost transformation approaches differ from country to country and activity to activity. Spanish banks and, to a lesser extent, Italian and Greek banks need to make the most significant cuts. Most European banks will aim to make cuts in corporate & investment banking, consumer finance and support functions. They will also leverage front office productivity, simplify proposals, consolidate IT or streamline carve-outs and processes in a front-to-back approach.
Roland Berger's experts have identified initiatives that will form the backbone of cost transformation at European banks. Aiming at "performance from simplicity", they emphasize three main areas:
- Fast-impact transformation (FIT) to make organizational structures more efficient in the short term (less than 18 months). Following a decade of increasing complexity, banks will have to quickly apply levers such as streamlining, standardization, simplification and skills alignment. These specific levers can add over 60% in additional savings compared to more traditional levers such as automation and mutualization.
- Streamline organizational structures to develop accountability within the organization. Banks will focus their efforts on reducing the number of management levels, eliminating overlaps within the organization and getting rid of embedded support. This will lead to fewer managers (up to 20%), simplification by removing hierarchical levels plus organizational consolidation initiatives (standardizing IT platforms; designing and implementing global or regional hubs for IT and operations).
- Refocus the banking footprint by reducing product/channel variety, carving out and outsourcing non-core activities and consolidating processes using shared services. Based on their experience, Roland Berger experts estimate that product portfolio simplification can cut expenses by 10% to 90%, by making products easier for employees to sell and for customers to choose. This in turn reduces operating costs. Roland Berger estimates that offshoring, carve-out and spin-off initiatives will be accelerated and become a top priority at most European banks.
However, the consultants at Roland Berger believe that to shift from cost adaptation to cost transformation, banks will have to overcome significant hurdles compared to other industries. These hurdles include a lower cost culture, social constraints in several countries and the cost of regulation. The consultants assume that front office functions will not be considered "sacred cows". Potentially 15,000 to 20,000 branches could face closure, which would be quite a departure from past practice.
In Roland Berger's experience, the success of cost transformation relies on designing the right approach aligned with cost pressure and internal/external constraints to deliver savings. Top management needs to be committed to the initiatives, which have to be rooted in the corporate culture. Rigorous program management is also required to track savings. The social impact will be a big part of the equation, with the workforce dropping to early 2000 levels.