- European banks have struggled since the global financial crisis of 2008 and the subsequent sovereign debt crisis in the euro zone.
- The Stoxx Europe 600 banking index has dropped about 60% since February 2008. Meanwhile, the Dow Jones U.S. banking index has risen about 23% during the same period.
- However, European banks are facing other challenges.
Several major banks in Europe have seen changes in top management recently, in what experts suggest will be a new era for the region's finance industry.
UBS, Credit Suisse, ING and HSBC are changing their leadership. RBS appointed a new chief in November. Barclays is also reportedly looking at a new chief executive officer to replace Jes Staley at the end of next year, according to the Financial Times. Barclays did not want to comment on the report when contacted by CNBC Monday.
The trend to reshuffle top management comes after a decade of weak growth. Analysts believe European banks are now entering a new phase, despite more work still being needed to regain market share.
"The recent CEO movement trend is perpetuated by a mini-bank sector cycle coming to a close," Tom Kinmonth, senior fixed income strategist at ABN AMRO, told CNBC via email Monday.
He explained that regulatory fines and outstanding cases have begun to reach some form of conclusion and that "capital demands from regulators have begun to subside for the first time in a decade."
European banks have struggled since the global financial crisis of 2008 and the subsequent sovereign debt crisis in the euro zone. Regulators have demanded higher capital requirements, economic growth has stalled and the European Central Bank (ECB) has embarked on negative interest rates. As a result, some lenders have frozen bonuses, slashed their workforce and shifted their operations.
The Stoxx Europe 600 banking index has dropped about 60% since February 2008. Meanwhile, the Dow Jones U.S. banking index has risen about 23% during the same period. The price moves reflect how U.S. banks have managed to repair their balance sheets much faster than European lenders after the crash.
"There is pressure on banks to speed up their improvements in their returns on equity, which have been improving but only slowly and not for all banks," Jeffrey Sacks, head of investment strategy at Citi Private Bank, told CNBC via email. He added that "new CEOs bring new turnaround plans, and that may also include more cross-border mergers if regulations and national politics allow."
European banks have considered mergers as a way to boost their business. The most recent high-profile discussions involved Deutsche Bank and Commerzbank, but the two German banks ended talks in April after deciding it would have been too risky to combine operations.
"Banks have spent the last four years making huge changes in their structure to accommodate the host of challenges and changes in risk metrics," Kinmonth told CNBC. He added that "the CEO movement we see now is the natural result as bank strategic plans begin to reach an end and we move to the next round of change management for 2024."
In the latest round of earnings, European banks showed higher profitability returns from those seen at the height of the sovereign debt crisis. UBS posted a return on tangible equity (ROTE) of 9% 2019, higher from 1.2% in 2012. Credit Suisse's announced a ROTE of 9% in 2019 as well, compared to 2.9% in 2012. ING's ROTE stood at 9.4% in 2019, from 5.9% in 2012.
However, European banks are facing other challenges. "Banks are dead, but banking is not," Francesco Filia, chief executive officer of asset management firm Fasanara Capital, told CNBC.
"They need to react to that forcefully, debunking their operative models and equipping themselves of the tech tools of the new economy. Recent management reshuffles are positive as they seem to reflect the awareness of such existential threat," he also said.
In a written announcement earlier this month, UBS said that it was hiring Ralph Hamers from ING as its next chief executive officer to lead the business "into its next chapter." The Swiss bank also pointed out that Hamers' experience in digital transformation was a key reason for the decision.
Speaking to CNBC, Sacks from Citi Private Bank also mentioned that there are "bank-specific challenges, including higher regulatory costs, competition from non-banks, need for more IT investment and sector fragmentation."
In addition, European lenders are also likely to face low interest rates for longer. Investors are currently pricing in an ECB rate cut sooner rather than later on the back of growing concerns over the coronavirus, Reuters reported Monday.
"Even if we assume much faster European GDP growth, we wouldn't expect an ECB hike," UBS analysts said in a note in December, hinting that negative rates will remain a big obstacle to profit-making.
"With costs sticky we expect banks to cut their ROTE (return on tangible equity) targets and restart restructuring — with HSBC and RBS reducing investment banking capital allocations, increasing pressure on others to follow," UBS analysts said.