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Cost Reduction in the European Banking Sector

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.

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