Banking Radar: Retail bank cost-income ratio drops in 2023 and profit per customer rises

Global consultancy Kearney has today released the sixteenth edition of its annual European Retail Banking Radar, which tracks the performance of close to 90 retail banks across 21 European markets. The study found that higher interest rates fueled a record year for retail banks. However, it also warned that banks should be leveraging their current financial position to prepare to navigate growing economic headwinds.

Record year for banks in 2023

• 2023 was an exceptional year for retail banking revenue, efficiency and profitability, with the income of the banks covered by the Radar reaching 365 billion euros in 2023, an 18% increase on 2022.
• Net interest income grew 23.5% in 2023, while net commission income only grew 1.5%
• Income per client and income per employee also grew to 830 euros (2022: 686 euros), and 356,000 euros (2022: 301,000 euros) respectively.
• The increase in income meant that the cost-income ratio for most banks was vastly improved at an average of 53%, dropping from 60% in 2022.
• As a result, profit per customer jumped 45% from an average of 233 euros in 2022 to 337 euros in 2023.
• Selected countries, such as Italy, Slovenia and Poland more than doubled the profitability per client in the course of one year.

Are Romanian banks prepared for ahead coming headwinds?

“High interest rates continued to fuel a good context for Romanian banks. Soon, however, the situation will likely change, when net income interest will fall much faster than costs can be optimized. While Romanian banks registered above average income growth vs European peers, they still need to catch-up (even with some CEE peers) in productivity metrics like profit per client or income per employee.

Banks have two main options ahead to prepare for the next economic cycle:

• diversify sources of income into non-lending, net fees, and commissions, charging more for services and more value delivered to customers (other than charging for money i.e. lending)
• optimize cost base heavily, meaning 2 digits cost-income ratio improvement.

Some banks, however, must work on both sides of the story, and that is not easy: to grow while cutting cost,” says Florian Teleaba, office head Kearney Bucharest.

Profits must be used to prepare for future challenges

• The study found that while the cost base did not grow as fast as income in 2023, the increase of 5.2% still meant a 10 billion euro growth in costs for the banks covered by the Radar. This is the largest increase in 16 years.
• Saving and lending were also affected by inflation and interest rate hikes. Client deposits only rose by 0.5% in 2023, compared to a historical average of 2 – 4% per year. Lending growth followed a similar pattern, averaging only 0.7% growth for the year.