Core Europe: the art of how to prevail in retail banking

Despite COVID-19, a severe economic downturn and record-low interest rates, Core Europe remains a solid market for retail banking


We are living in one of the most dynamic and transformative periods of banking. These developments have been at work for some time and are not merely a result of the COVID-19 health crisis. On the contrary, the pandemic serves as an accelerator and catalyst for this transformational change. The traditional banking model is defined by persistently low profitability, structural cost challenges, a legacy approach to technology, and ever-changing customer behaviour. A focus on simplification, technology and efficiency will serve as key levers to help consolidate the banking landscape.


Banking in the DACH region
Almost no nation has been spared the economic consequences stemming from the COVID-19 health crisis, which was characterised as a global pandemic by the World Health Organisation (WHO) in early March last year. Early on, the crisis triggered unprecedented market volatility and uncertainty not seen since the financial crisis. The COVID-19 outbreak has led to varying responses, and at varying speeds, from governments across the globe. The developments this year will undoubtedly require a rethink of how businesses operate and engage with customers.

If we turn our attention to focus on Core Europe, the situation for banks in the DACH region (made up of Germany, Austria, and Switzerland) looks particularly interesting. Pre-COVID-19, the average return on equity for German banks was below three percent; while Austria consistently ranks as one of the most densely banked countries in Europe.

We are convinced that simplification and efficiency are key differentiators across the European banking landscape

The region is at times mischaracterised as being structurally unprofitable for banking. A good deal of the below-average profitability of banks in the region can be attributed to cost challenges, a legacy approach to technology, overly complex business models, and, to a certain degree, a fragmented banking market. We see this as an opportunity, in terms of applying an industrialised approach to banking, as well as presenting further opportunities for consolidation. More importantly, our focus is on the strong macroeconomic backdrop of the region, which helps to inform our view. The DACH region is a market with over 100 million people, roughly one-third the size of the US, with solid underlying macroeconomic fundamentals and ample fiscal capabilities, more true today than at any other point in time.


Robust government crisis responses
In the DACH region, governments quickly implemented effective policies to contain the spread of COVID-19 to avoid putting their healthcare infrastructure at risk. Austria, which is the core and foundation of our business, implemented a lockdown affecting all businesses with the exception of critical infrastructure earlier than most countries in mid-March, and a second lockdown, in early November. DACH countries have gone to great lengths to support their economies and have put in place extensive stimulus packages. In Austria this amounted to over €50bn, or approximately 13 percent of GDP, while in Germany the fiscal stimulus package amounted to over €1trn, or approximately 30 percent of GDP.

This was possible as a result of the DACH countries’ strong fiscal positions, with a relatively low debt-to-GDP ratio and low levels of both consumer debt and homeownership when compared with Anglo-Saxon countries. These are all good macro factors from a retail banking standpoint and should translate to a lower cost of equity, given the stability and low volatility of the region. With a strong macroeconomic backdrop, a stable legal system, a stable regulatory environment and low levels of consumer indebtedness augmented with strong risk management, conservative underwriting and an industrialised approach to banking, we believe this to be a formula for success in retail banking across the region.


Our role as a bank in times of crisis
It goes without saying that BAWAG Group’s business will forever be changed by the events of 2020. Despite the aforementioned all-too-familiar challenges, we see many opportunities across the European banking landscape. Defining core competencies, focusing on core markets, being laser-focused on a handful of core products and services, maintaining a conservative risk appetite, and simplification are keys to driving consistent and profitable growth. BAWAG Group entered the crisis from a position of strength, having transformed the business and having kept its strategy consistent over the years. More than ever, we see a commitment to simplification and efficiency as key, as well as greater caution and prudence in order to address the challenges ahead. As a bank, we have played a critical role in keeping companies afloat and guaranteeing the financial security of our customers. We refocused our efforts on the well-being and full service of our customer base during these difficult and challenging times. Our digitalisation and simplification efforts in recent years are paying off, as we are able to ensure smooth and consistent operations, stay focused on execution, and most importantly, deliver for our customers and local communities.

During the lockdowns, all branches in Austria and Germany remained open with strict safety measures and distancing rules in order to protect our front-line employees. We quickly launched a simplified online application process for payment holidays for our customers and provided immediate access to government guarantee programs for SME clients. The past few months have also triggered a significant shift in how we engage with customers as well as how our team members work together. The post-COVID-19 workplace and operating infrastructure will look very different to what it was before 2020. Since the onset of the pandemic, over 75 percent of our employees have been working from home. We have decided that a flexible working environment will be permanently incorporated into our operating framework. This will provide for a more flexible and dynamic work environment, improved work-life balance, and a continuous reassessment of our overall operating infrastructure.


Focusing on what can be controlled
For BAWAG Group, 2019 was a record year, delivering net profit of €459m, a return on tangible common equity of 16.1 percent and a cost-income ratio of 42.7 percent.

For the first nine months of 2020, BAWAG Group reported a net profit of €201m, a return on tangible common equity of 9.6 percent and a cost-income ratio of 43 percent. The underlying operating performance of our business remained solid with pre-provision profits of €495m; allowing us to take a conservative and prudent approach to provisioning given the uncertainties in both the scope and length of the pandemic.

Despite the challenges stemming from the COVID-19 crisis, we continued to transform our business and focus on the things that we control, accelerating initiatives to further simplify our operations. Specifically, we have taken the next strategic step in consolidating our domestic and international retail and SME businesses, focusing on providing standard products and services across the DACH region. We are combining our strengths across the company to centralise and enhance operations; this will ultimately result in greater simplification and most importantly, an enhanced customer experience.


The strategy of being simple and efficient
We are now looking into the future as the changes we have experienced over the course of the last year due to the crisis will serve as a catalyst for accelerated long-term changes across the Group. We are going to do our best in continuing to navigate these uncertain times, ensuring that we protect our employees, support our customers and local communities, and protect and grow our franchise. Our goal is to always maintain a strong capital position, stable retail deposits, and a low risk profile. We do this by focusing our strategy on mature, developed and sustainable markets while always applying conservative and disciplined underwriting standards across all of our products.

We are more convinced than ever that simplification and efficiency are key competitive differentiators across the European banking landscape.

Defining core competencies, being laser-focused on a handful of core products and services and continuously simplifying our business over the years has allowed us to establish a highly efficient business with a cost-income ratio in the low 40s. This generated mid-teen returns pre-COVID-19 and healthy pre-provision profits. This gives us the flexibility to proactively and prudently address potential risks arising from a severe economic downturn. We will continue to play our part in supporting our customers and our local communities while protecting and growing our franchise in the times ahead. We will focus on the things that we control, continuing to drive operational excellence and disciplined and profitable growth.