European banking’s biggest challenge

Lafferty Group publishes From Hidden Gems to Wounded Giants: The search for quality in European banking

European banking is facing challenges on almost every front, with much press coverage – and a considerable amount of PR and marketing material – suggesting that the biggest challenge facing banks is fintech businesses looking to take over profitable business areas. Persistent negative interest rates are also presenting unprecedented challenges.

However, a new report from Lafferty Group, From Hidden Gems to Wounded Giants: The search for quality in European banking, presents compelling evidence that most of the banks’ problems are internal. Much of this report will be invaluable, if alarming, news for the leaders of European banks.

From Hidden Gems to Wounded Giants is a first in reporting on banks – an in-depth, bank-by-bank look at 100 leading large and medium-sized quoted European banks. Despite the many challenges, the report ferrets out evidence of high quality in European banking and identifies banks from 25 different European countries that are head and shoulders above their peers.

Nine percent of European banks covered in the new report score four stars out of five on Lafferty’s bank quality rating scale – and those banks can be found in Sweden, Norway, the United Kingdom, Turkey and Poland. Swedish banking (given the presence of Swedbank, Handelsbanken and Collector Bank in the top nine) stands out – with Handelsbanken’s influence clearly at work both inside and outside the country.

These banks could be called ‘hidden gems’, as they are far from being household names. However, most European banks are mediocre, with almost 90 percent of the banks selected for this report languishing in the twoand three-star range – and not a single European bank earning a five-star rating. (Only one bank out of almost 200 global banks surveyed to date – Capitec in South Africa – qualifies for the five-star rating.)

The G-SIBs largely fall in the two-star category, and we identify many of these as ‘wounded giants’. Some will recover, but others look likely to present problems for many months if not years to come.

The Lafferty Bank Quality Ratings team has identified several reasons why European banks are so middle-of-the-road, including the following internal challenges:

• The bank persists with a growth strategy in an environment that rewards profitability • The bank is seriously undercapitalised

• The bank has the wrong business model

• The bank is rewarding the CEO and top executives for doing the wrong things

• The bank continues to promote the wrong culture While claiming to take customer satisfaction seriously, the bank does not measure it independently, or publish those findings.

The Lafferty Bank Quality Ratings project was developed in response to myriad queries for research on quality banks, which Lafferty Group defines as banks carrying out business in a manner likely to be sustainable over the long term, while taking account of new thinking in bank management, including the need for leading executives to have formal banking qualifications, the need for banks to measure and publish customer satisfaction ratings, and a move away from reliance on metrics (such as return on equity) which have been discredited.