The staff came as a surprise. The largest Swiss bank, UBS, has hired Ralph Hamers, the CEO of the Dutch ING Group, as its new head from September. The previous head of the group Sergio Ermotti is leaving. The Italian had restructured the bank after the financial crisis and made the promising segment of asset management strong.
However, Ermotti was unable to get a grip on one problem: profits stagnated at around 19 billion US dollars in 2019, while earnings fell by three percent. The bank’s costs also fell, but not as much as expected. For every dollar earned, UBS spent around 80 cents. That is a lot. The traditional Swiss bank has thus missed its return target. The reasons for this are the high costs for the restructuring of the group, write-downs on divested businesses and, of course, the negative interest rates of the central banks.
Whether Switzerland or the EU – almost all of the banks’ balance sheets are affected by these phenomena, and the institutions are lagging behind the falling revenues with austerity measures. The same is true for Deutsche Bank. The major British bank HSBC has just announced drastic job cuts, the German subsidiary of ING Group is toppling its free current account, and the major French bank BNP Paribas has revised its yield target downwards. Only the Spanish competitor Banco Santander has recently surprised with a jump in profits.
However, it is by no means the case that the restructuring measures did not achieve anything. “On average, European banks have improved their net earnings and the quality of their assets, while they have lost efficiency, liquidity and capital ratios,” says João Soares, banking expert at the consultancy Bain & Company. Most of them don’t even earn their cost of equity.
And the financial institutions are lagging behind current developments. New clouds are piling up on the horizon: if coronavirus, brexite negotiations and the trade dispute between the USA and China slow down the economy, risk provisions for loans at risk of default will rise. In the corporate customer business of German banks, this has already increased by 17 percent in the first half of 2019, Bain & Company has calculated.
Hamers’ task at UBS is therefore not only to digitize the bank, which specializes in wealthy clients and investment banking. This is exactly what the man stands for. “Under his leadership, ING has undergone a fundamental change in its business model,” commented UBS President Axel Weber on the personnel decision. But above all, his firm needs a tough cost-cutting programme. The management consultancy McKinsey sees potential throughout the industry, for example in the IT, branch and sales areas – between 20 and 40 percent in each case.
Since joining ING in 2013, Hamers has only been able to reduce the cost/income ratio by around three percent, which is an achievement considering the interest rate environment. And at almost 55 percent, the Dutch financial group is much more efficiently positioned than its Swiss competitors. ING also has one of the highest equity ratios of the major European banks at 14.6 per cent and is therefore well equipped for tougher times. Only the British bank HSBC is above this, but it is more vulnerable than its mainland competitors due to the effects of the brexit.
Of all countries, Spain – one of the countries that were hardest hit by the euro crisis ten years ago – is currently the country where banks are in the best position. Banco Santander reported profit growth of three percent to EUR 8.3 billion in 2019, which is a healthy increase compared with its competitors. Although the return on equity fell slightly, the bank, which is headquartered in the city of Santander, is still one of the front-runners at just under twelve percent. For comparison: Deutsche Bank has reported a loss of 5.3 billion euros for 2019 and a profitability of minus eleven percent. The fact that the Spanish bankers only have to spend 47 cents for one euro of income is proof of a cost-efficient structure.
The robust performance is partly due to the fact that Banco Santander has a strong business in South America and is therefore less dependent on interest rates. But it also has to do with the financial crisis: “The restructuring that this has forced Spanish banks to undertake has meant that they have cut more staff, closed branches and reduced their costs than institutions in other countries,” says Spanish economist Juan Ignacio Crespo.
French competitor BNP Paribas is also on the right track. The Paris-based bank surprised the analysts with a net profit increase of around nine percent to 8.2 billion euros in 2019. In addition, earnings rose more strongly than costs. One driver is the investment bank, where earnings rose disproportionately by twelve percent. With the acquisition of part of Deutsche Bank’s investment banking business, BNP Paribas is also strengthening the segment from 2021. Here too, a bank has probably found a viable model – and can loosen the reins.