“The combination of poor profitability and potentially worsening asset quality has pushed to the fore the need for banks to achieve greater operating efficiencies and lower cost bases,” said Marco Troiano, deputy head of the financial institutions team at Scope Ratings. “The case for cross-border mergers is weaker as the cost synergies are less obvious. This puts the focus sharply on in-country consolidation.”

M&A can help accelerate branch closures and associated efficiency gains. “Clearly, mergers create branch overlaps, allowing banks to consolidate the customers of two branches into one. But the benefits of greater scale will also be seen in bigger budgets to drive critical digitisation efforts in the wake of evolving customer needs,” Troiano added.

A lot of attention will fall on Spain and Italy around consolidation. Banking markets in both countries continue to be fragmented, with several mid-scale banks that as a group have become subject to consolidation talk, either as mergers of equals or as add-ons to national champions.

Spanish banks have made drastic efforts since the global financial crisis to improve efficiency. They were among the most active in Europe to adjust their branch networks, as well as their workforce, even if the two have not always followed the same pace of adjustment. There is still room for efficiency gains, particularly as digitisation continues.

Bearing in mind the respective size of populations in several European countries, efforts by Spanish banks have been no more than playing catch-up and done no more than kept them on a par with peers in countries like France, Italy, or Germany.

“More seminal changes to banks’ operating models are being brought to bear by rapidly changing customer behaviour,” Troiano said. “Customers are actively embracing new technologies, which questions the value of large branch networks. Covid-19 has accelerated this process, and banks now have an imperative to further reduce their networks.”

This process is not a sprint but a marathon. The finish line may ultimately be the disappearance of bank branches from the high street in scale. In some countries in Northern Europe, such as the Netherlands, a single branch can serve up to 10,000 customers. That is approximately seven times the number of customers served on average by a bank branch in Spain.

The process, even in these countries – which are a lot more advanced in the shift to the new normal – is ongoing. Sweden’s Handelsbanken, for example, recently announced it is almost halving its branch network from 380 to 200 by the end of 2021 as digitalisation among its customers has progressed to such an extent., while Deutsche Bank is reportedly considering closing 20% of its branches in Germany.

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Author: Keith Mullin: k.mullin@scopegroup.com