According to a report by the global audit firm KPMG LLP, commercial lenders are unable to effectively restructure or disburse toxic assets due to massively underperforming economic growth all across Europe. Stricter government banking regulations have also hindered the efficiency of the banking sector, which is caught in the crosshair of the inept consumer phenomenon and Basel III rules.
“Successful banks will restructure their balance sheets to minimise the impact of new regulations and reduce their cost-to-income ratios through the smart use of technology,” Marcus Evans of KPMG said. “Reversing the profitability of European banks is not a lost cause but it will certainly be a lot of hard work.”
Since 2008, the total volume of NPLs has risen from roughly 1.5pc of all loans issued to over 5pc in 2013, and that figure is growing, KPMG’s report said. Meanwhile, the regulatory pressure, which has been on the rise since the implementation of Basel II rules and continues amid the release of Basel IV, will add some 0.5pc to European banking costs in the near-term.
“It’s clear that across Europe, banks are still grappling with the new world of low, or negative, interest rates and mounting capital and regulatory costs,” Evans added.
All that said, banking in the traditional sense – issuing commercial loans for profit – is becoming increasingly unprofitable in Europe. Subsequently, as traditional lenders are exiting the financing of many projects in the real economy, growth prospects look feeble. Non-traditional lenders are occupying the niches abandoned by banks, offering flexible financing options to the economy at higher interest rates, resulting in shaky growth and mounting risks.
The use of technology could help banks resolve the profitability issue. As observed by KPMG’s Evans, “streamlining back-office processes and moving to digital distribution channels is essential future-proofing and will ensure long-term savings.”
Nonetheless, it might takes banks “decades rather than years” to decrease their exposure to NPLs, KPMG observed, even should lending profitability recover. In the end, the patterns of loan servicing depend on consumer confidence and incomes, which are determined by economic growth.