The Covid-19 crisis will have a major impact on the European banking sector. The very cautious behavior of companies and individuals could exacerbate the difficulties faced by these players.
Rising deposits and risks
Already very low before the pandemic, the profitability of European banks fell by two-thirds in Q1 2020, and is now "well below the cost of capital", reveals BCG. The impact of the crisis can also be seen in banks' balance sheets. Demand deposits have risen by 7.6% since January for professionals, while short- and long-term loans granted to them have increased by 4.5% and 4.8% respectively over the same period. For private customers, the situation is broadly similar, with sight deposits up by 4.4% since the start of the year.
The cost of risk has soared in European banking establishments. HSBC, UBS and Santander have increased their provisions to more than 6 billion euros to cope with rising risks. And this is just the beginning, as total provisions for fiscal 2020 could reach as much as $11 billion.
Several scenarios considered
Whatever the extent of the crisis, European banks' revenues are set to fall by 2-8% by the end of the year, according to BCG's study. By 2024, they could be 5% to 20% below their pre-crisis levels.
The firm puts forward several hypotheses: that of a "slow contamination of the financial system by the crisis in the real economy", with bankruptcies of non-financial companies spilling over into the banking sector; that of a new pandemic peak, leading to exacerbated geopolitical tensions or economic shocks on an unprecedented scale; and that of a faster V-shaped recovery.
French banks more solid
French banks remain "rather solid" within the European landscape. In a report published in May 2020, McKinsey anticipates a "limited" 20% drop in revenues.
Lower revenues mean lower costs. However, this does not necessarily mean branch closures or downsizing. Pooling certain practices, particularly in IT, can be another way of cutting costs. This enables banks to continue offering a wide range of services without massive investment, or to achieve economies of scale by concentrating the flows of several establishments.
"One thing is clear now: there will be no return to 2019 standards," notes the report published by McKinsey.