Structure And Performance Trends In Eu Banking1

Increasing competition in financial services has had the result of reducing the number of banks operating in many countries and this trend is common to virtually all European banking markets. It is also apparent across different types of banks, including the mutual savings and cooperative banks as

Table 5.1 Number of banks: banking system, 1984-1997

Country

1984

1989

1992

1994

1996

1997

Austria

1,257

1,240

1,104

1,053

1,019

995

Belgium

165

157

157

147

141

134

Denmark

231

233

210

202

197

197

Finland

644

552

365

356

350

350

France

358

418

617

607

570

519

Germany

3,025

4,089

4,200

3,872

3,674

3,578

Italy

1,137

1,127

1,073

1,002

937

935

Netherlands

2,079

1,058

921

744

658

628

Norway

248

179

158

153

153

154

Portugal

18

29

35

44

51

62

Spain

369

333

319

316

313

307

Sweden

176

144

119

125

124

120

UK

598

551

518

486

478

466

Sources: Central bank reports (various) and Gardener et al. (1999a).

Sources: Central bank reports (various) and Gardener et al. (1999a).

well as for domestic commercial banks. Nevertheless, there still remain a large number of banks operating in Europe, as illustrated in Table 5.1. All countries (apart from Portugal) experienced a decline in the number of banks since 1992. What Table 5.1 does not reveal, however, is that the number of foreign banks has increased in every banking market over the same period, reflecting the internationalization trend and the opportunities afforded by the EU's Single Market Programme (EC, 1997).

The widespread decline in the number of banks in Europe throughout the 1990s, however, has not been exactly mirrored by a similar trend in branch numbers, as shown in Table 5.2. In fact in many of the larger banking markets (such as Germany, Italy and Spain) branch numbers have proliferated during the 1990s. In the last two cases this has mainly been the result of the removal of branching/territorial restrictions that were in place up to the late 1980s/early 1990s. In Germany, the increase in branch numbers has been mainly a reflection of reunification as well as expansion of the savings banks sector, the latter reflecting increased non-price competition. In Belgium, Finland, Norway, Sweden and the UK there has been a decline in branch numbers. The fall in branches in Scandinavian countries is primarily a consequence of the consolidation and restructuring resulting from the banking crises of 1991/92. Only in the case of Belgium and the UK can it be attributed in large part to the domestic consolidation processes.

Table 5.2 Number of branches, 1984-1997

Country

1984

1989

1992

1994

1996

1997

Austria

4,005

4,378

4,667

4,683

4,694

4,691

Belgium

23,502

19,211

16,405

17,040

10,441

7,358

Denmark

3,515

3,182

2,358

2,245

2,138

2,480

Finland

2,886

3,528

3,087

2,151

1,785

1,745

France

25,490

25,634

25,479

25,389

25,434

25,464

Germany

35,752

39,651

39,295

48,721

47,741

63,186

Italy

13,045

15,683

20,914

23,120

24,406

25,250

Netherlands

5,475

8,006

7,518

7,269

7,219

7,071

Norway

1,940

1,796

1,593

1,552

1,503

1,500

Portugal

1,469

1,741

2,852

3,401

3,842

4,645

Spain

31,876

34,511

35,476

35,591

37,079

37,634

Sweden

3,083

3,302

2,910

2,998

2,527

2,505

UK

21,853

20,419

18,218

17,362

16,192

15,253

Source: Gardener et al. (1999a).

Source: Gardener et al. (1999a).

Tables 5.1 and 5.2 broadly indicate that European banking markets are characterized by a relatively large number of domestic banks which, in some cases, have expanded their branching presence during the 1990s. So while consolidation has undoubtedly been taking place in each banking system, the trend in branch numbers suggests that access to banking services in a range of countries, notwithstanding the introduction of new delivery systems (such as telephone and internet-based operations), has increased.

While access to bank branches in most countries does not appear to have been significantly adversely affected by consolidation and market restructuring during the 1990s, the fall in the number of banks and increased market concentration may have adversely affected customer choice. Table 5.3 illustrates that the top five banks, especially in the smaller European banking markets, tend to dominate overall banking business. A study by the European Commission (EC, 1997) also shows that in every EU country between 1979 and 1995, apart from France, Greece and Luxembourg, the five-firm assets concentration ratio increased. In particular, Denmark, Spain, the UK, Belgium and the Netherlands experienced the largest increases during the 1990s. The EC (1997) study did not cover Finland, Sweden and Norway, but all of these countries experienced large increases in market consolidation resulting from restructuring after the banking crises of the early 1990s.

Overall, European banking markets are (in most cases) characterized by

Table 5.3 Concentration in European banking, 1997

Country

Five-firm assets concentration (%)

Change in concentration ratio, 1996-97 (%)

Germany

16.68

+3.73

Italy

24.60

-3.15

France

40.30

-2.18

UK

28.00

0.00

Belgium

57.00

+3.64

Portugal

76.00

-5.00

Finland

77.77

+5.72

Netherlands

79.40

+5.31

Denmark

73.00

- 6.41

Sweden

89.71

+4.06

a declining number of banks, although most systems have a large number of small local and regional banks with substantial branch operations serving (together with the main commercial banks and specialist lenders) a wide range of banking customers. Market concentration, however, is increasing and in the smaller banking systems the five-firm assets ratio typically exceeds 60 per cent. While the decline in the number of banks and increased market concentration may suggest that banking service choice is declining, the growth in branch numbers in many systems may counter this trend. In addition, increasing foreign bank presence as well as the growth of non-traditional banking service providers, such as retailers and asset-backed financing firms (leasing and factoring companies, consumer finance companies and so forth), make it difficult to state categorically that overall customer choice is declining.

A stronger indication that consolidation and the overall decline in the number of banks have not adversely affected competitive conditions in European banking is reflected in the decline in net interest margins in virtually every banking system, as shown in Table 5.4. While margins obviously vary with the interest cycle and there has been a convergence of money market rates to a lower level during the 1990s (especially in countries aiming to achieve the EMU criteria), the overall trend is downward. As net interest margins have been subjected to increasing competitive pressures - resulting, generally, in downward pressures on earnings streams relative to cost - banks have increasingly focused on growing other, non-interest income sources of earnings. Fees and commissions are

Table 5.4 Net interest margins, 1984-1997 (%)

Country

1984

1989

1992

1994

1996

1997

Austria

-

1.73

1.85

1.90

1.43

1.35

Belgium

-

1.57

1.51

1.33

1.32

1.46

Denmark

3.01

2.55

3.56

3.83

1.79

1.75

Finland

2.42

1.84

1.55

2.05

1.90

2.73

France

-

1.91

1.63

1.27

1.20

1.39

Germany

2.50

2.01

2.07

2.18

1.46

1.60

Italy

-

3.28

3.17

2.63

2.42

2.57

Netherlands

2.23

2.08

1.83

1.89

1.67

1.09

Norway

3.71

3.45

3.51

3.44

2.41

2.46

Portugal

1.86

4.12

4.11

2.78

1.95

2.14

Spain

4.15

4.05

3.59

3.00

2.54

2.66

Sweden

2.55

2.53

2.55

2.77

1.81

1.98

UK

3.00

3.10

2.60

2.40

2.10

2.20

Sources: BankScope database, Central Bank Reports (various) and Gardener et al. (1999a).

Sources: BankScope database, Central Bank Reports (various) and Gardener et al. (1999a).

one example of an income stream arising from banks diversifying their activities. The growth of bancassurance and off-balance sheet operations has further fuelled the potential of non-interest income in generating profitability. Table 5.5 shows the trend towards an increase in non-interest income as a proportion of total income in every European banking system.

While the trends in the sources of bank income are clear - a fall in interest margins compensated by an increase in non-interest income - the picture for cost levels is less obvious. It must be remembered that bank efficiency levels can be affected both by endogenous and by exogenous factors. The usual measure for bank efficiency is the cost-income ratio; adverse economic conditions affect the cost-income ratio in the sense that banks do not have total control over their income streams, while restrictive labour laws in many continental European countries hinder staff reductions and productivity improvements on the cost side. In addition, mergers and acquisitions (M&A) activity can add to costs in the short term before all the efficiency savings or/and increased revenue streams are worked through. Also, various income sources, such as those from trading activities, are notoriously volatile. Thus, recent (between 1994 and 1997) increases in the cost-income ratio are just as likely to reflect trends in earnings rather than costs. Nevertheless, the overall trend in European cost-income ratios is expected to be downwards because inter alia banks

Table 5.5 Non-interest income/gross income, 1984-1997 (%)

Country

1984

1989

1992

1994

1996

1997

Austria

-

27.9

33.4

28.7

38.7

32.6

Belgium

-

22.7

21.6

23.9

35.2

35.0

Denmark

15.5

21.8

13.1

16.7

17.7

34.5

Finland

43.2

48.5

59.6

46.9

47.7

40.2

France

-

19.7

31.3

35.7

39.4

38.4

Germany

18.0

25.6

23.9

19.4

21.5

26.7

Italy

-

22.3

18.3

23.7

30.4

34.1

Netherlands

24.7

29.4

28.6

29.0

35.0

40.6

Norway

24.2

26.1

21.1

17.9

24.7

25.7

Portugal

39.4

16.3

24.8

27.3

34.2

36.3

Spain

14.0

17.6

20.3

21.6

24.3

25.8

Sweden

46.2

45.0

39.6

35.7

42.0

27.5

UK

35.6

37.6

42.2

43.2

44.4

43.7

Sources: BankScope database and Gardener et al. (1999a).

Sources: BankScope database and Gardener et al. (1999a).

are seeking good-quality business against a background of improving risk controls and enhanced efficiency.

Table 5.6 shows that in the majority of countries the general trend in bank cost-income ratios has been downwards since 1994. The only banking systems, however, which have systematically and most significantly improved their efficiency levels between 1992 and 1997 are Austria, Denmark, Germany, Finland, Sweden and the UK. According to McCauley and White (1997) and White (1998), the UK experienced more M&A activity in its banking sector (in value terms) between 1991 and 1997 than any other European banking market, and these cost improvements could be a partial reflection of this trend. All of the main UK banks have also embarked on aggressive cost-cutting strategies in terms of branch closures and manpower reductions. The improved cost performance of the Scandinavian banks is mainly a consequence of the forced reorganizations following the banking crises of the early 1990s.

The aforementioned income and cost trends feed through into profitability figures, which are shown in Table 5.7. The return on equity (ROE) figures present a mixed picture, although in the majority of countries ROE improved between 1994 and 1997. Given that there is no obvious downward trend in bank performance across countries, some might argue that this is evidence that competition is not increasing in European banking markets.

Table 5.6 Cost-income ratios, 1984-1997 (%)

Country

1984

1989

1992

1994

1996

1997

Austria

-

65.5

64.0

65.1

61.4

57.6

Belgium

-

66.8

66.9

71.3

61.1

67.8

Denmark

75.6

64.9

81.4

72.5

53.5

58.1

Finland

84.0

84.8

190.4

139.9

69.3

63.6

France

-

64.6

62.5

73.5

72.8

71.2

Germany

59.3

64.6

64.5

60.7

61.2

56.2

Italy

-

61.7

63.8

65.0

69.6

72.0

Netherlands

62.3

66.0

67.7

66.7

69.5

66.1

Norway

68.5

69.9

60.3

63.4

66.5

67.7

Portugal

67.0

46.8

53.0

58.2

56.5

63.2

Spain

64.0

60.9

60.3

59.7

63.8

63.7

Sweden

67.6

62.7

122.2

80.0

49.3

47.0

UK

66.9

64.8

65.9

64.1

60.3

60.9

Sources: BankScope database and Gardener et al. (1999a).

Table 5.7

Return on equity, 1984-1997 (%)

Country

1984

1989

1992

1994

1996

1997

Austria

-

10.0

6.9

7.9

9.4

5.1

Belgium

-

6.0

6.4

8.8

20.3

14.8

Denmark

1.0

3.0

-18.3

-0.9

16.4

11.8

Finland

5.1

4.0

-49.5

-25.7

11.9

19.8

France

-

9.4

4.3

-1.4

5.8

8.5

Germany

21.1

12.4

13.2

11.9

11.9

15.8

Italy

-

14.0

9.8

4.4

6.8

5.7

Netherlands

14.0

13.6

12.8

14.1

13.7

4.2

Norway

14.1

5.5

-5.8

19.3

18.0

10.1

Portugal

5.5

9.2

8.5

6.1

9.3

11.3

Spain

8.9

14.6

10.6

8.2

14.6

14.5

Sweden

4.6

5.9

18.5

19.1

23.9

8.7

UK

20.8

3.4

10.7

19.6

21.0

25.9

Sources: BankScope database and Gardener et al. (1999a).

Sources: BankScope database and Gardener et al. (1999a).

This viewpoint, however, is too simplistic. It neglects the fact that in all banking markets, traditional margin-based business is probably more competitive than ever before. In addition, banks are increasingly building on non-interest income in areas such as investment banking, brokerage, insurance, pensions, mutual funds and other collective investment product areas (to name but a few) where there are strong established operators; competition, therefore, is likely to be intense in many of these areas. The simplistic argument also neglects the role of technology and the importance of new competitors. For instance, advances in technology allow banks to out-source non-core processing and other activities to scale-efficient, third-party service providers. Customer databases also make the cross-selling and delivery of new types of financial products and services more effective and profitable. Technology has promoted the development of direct banking services and so forth. Non-bank financial intermediaries, retailers and other 'brand name' firms also compete nowadays against banks in the financial services area. These are all important elements that are helping to change the economics of banking business.

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