Battle of the Banks: The Fight for Profitable Business Models in Europe


European banks as a whole are running hard just to stand still. Sure, in light of the higher capital buffers they have erected, the banks might appear to be fairly resilient when viewed through recent stress tests by regulators. But in reality, reflections on average for European banks are next to useless in a continent of many distinct markets. A select group of banks that are performing well on a range of indicators have been increasing their lead over persistent laggards—particularly in the multiple accorded by equity investors. Indeed, the listed winners have more than a four times price-to-book ratio advantage over those banks at greatest risk of failure or bailout.

These conclusions emerge from Bain & Company’s 2017 health check of the banking system, the fourth annual analysis covering 111 banks in the base study. Our health check scoring model derives from three dimensions, two of which represent banks’ robustness

Our scoring brings together data from financial providers such as SNL Financial and Moody’s and combines their findings with banks’ own financial statements. The health check provides a uniquely integrated view, which stands in contrast to looking only at a balance sheet or income statement. Based on the combination of the critical financial ratios, we calculate a score for each bank and place it in one of four categories:

  • Winners. Some 38% of banks have attained this strong position. Scandinavian, Belgian and Dutch banks figure prominently in this group, outperforming on virtually all financial indicators.
  • Weaker business model. Banks in this quadrant continue to represent about 17% of the total. What may surprise some observers is the number of UK and German banks, including names that used to be references for good health, struggling to find a viable business model. In fact, virtually all the large German names fall into this category as their profitability and efficiency sit at a level comparable with their Greek counterparts.
  • Weaker balance sheet. Some 17% of banks have a priority to fix weak balance sheets, compared with 21% in 2013. Over the years, banks in this quadrant have shown vulnerabilities not yet fully reflected in their profit and loss statements. A leading Spanish lender, for instance, moved from this quadrant to the quadrant of highest concern in just two years.
  • Highest concern. Of the total base, 28% of banks flash a high-risk signal, up from 26% in 2013. Banks in Italy, Greece, Portugal and Spain form the bulk of this quadrant and have become a breed apart in continued distress. Every single bank that has failed in the past decade and for which there are financial statements available, as well as many banks that have merged into other entities, such as Spanish cajas or savings banks, fell into this quadrant before their demise. Executives at many of these banks either lacked an integrated view or were in denial about the warning signs.

The cost of inertia is striking, with investors rewarding the winners with a 1.31 price-to-book ratio and punishing the high-concern banks with a 0.31 price-to-book ratio. Equity markets also seem to reward banks with weak balance sheets, assigning them a slightly higher price-to-book ratio of 0.72 vs. banks with weak in-year profitability and efficiency, which were assigned a price-to-book ratio of 0.60.

Click here to download the study.