The profitability of retail banking in Belgium
Belgian retail banking achieves again increasing results, with a net profit before taxes of 29,2%.
Challenges remain numerous.
Results still on the upswing for the big Belgian banks
For the years 2013 and 2014, the heading quartet of retail banks doing business on the Belgian territory in terms of Net Banking Product and Results Before Taxes remains BNP Paribas Fortis, KBC, ING and Belfius, without any surprise.
A NBP constantly growing and costs maintained under control, these 2 factors explain the best result since the crisis that the Belgian retail banking realized in 2014.
Net profitability before taxes (Profit before taxes / NBP) of the leading quartet of Belgian retail banking sector increases of 1,8 points to 29,2%.
About the Net Banking Product of these same actors, the latter is on the upswing of 2,49% (+0,76 pts). A rise of the banking deposits and the credits by the actors of the panel explains it all.
This is realized in a tough economical context, with among other things the downward trend of the interest rates, a permanent risk of deflation and a Belgian government chasing new sources of revenues.
The downward trend of the interest rates impacts negatively the net banking product, reducing the balance sheet upwards (diminution of revenues) and downwards (diminution of costs). Biggest banks of the territory are relatively little concerned thanks to their size and volume. However, the fall of the interest rates damages directly the viability of smaller banks.
The entrance of new actors shakes the Belgian banking model up. The fintechs and other actors start gaining on the market shares of traditional banks even if the phenomenon remains marginal for the moment (crowdfunding for the credits, innovative payments…).
The aggregated costs remained stable and the operational expenses have been limited thanks to the pursuance of different plans of operational efficiency. The expenses linked to provisions and cost of risks are unchanged. However, the implementation costs due to new regulatory measures began to increase (NSFR, FATCA, CRS, T-LAC...). This continuous strengthening of the regulatory framework causes operational expenses for banks (IT projects, dedicated teams of control…) and various losses of business opportunities, pushing down the profitability.
Then, in spite of an unfavorable context, the profitability of retail banks in Belgium stays in good shape.
Belfius is the banks with the highest progress of rentability, coming from 6,2% in 2013 to 13,3% in 2014. Despite its inheritance of « bad bank » Dexia which remains influencing its profit, the bank that is 100% hold by the Belgian State finished its recovery plan with a raise of the net interest margin (+7%), net commissions (+20%) and a strong management of its operational expenses (-5,4%). Nevertheless this result must be put into perspective since Belfius is, this year again, the least profitable bank of our panel.
KBC keeps on maintaining the highest level of profitability of the panel with 41,2% in 2014 (slightly less good in comparison with 2013 (-2,9pts).
KBC maintains its level via excellent activities results and proportionally smaller amounts provisioned. Comparing with the main competitors, the operational expenses of KBC remain inferior. For example, the bank has processed to the reduction of its marketing and personal costs by relocating some of its activities.
ING shows strong performances: increase of its profitability (33,9% in 2014 (+5,4 pts)), raise of its NBP (+7,2%) and reduction of its operational expenses (60,4% in 2014 (-3,2 pts)), mainly consisting in staff costs. The personal and corporate credit services have progressed terrifically in 2014 (+9,4%, 82,5 billion euros).
BNPP Fortis is the third most profitable retail bank in proportion of its NBP (21,8% in 2014 (+2,1pts)). The raise of its results can be explained by the growth of loans banking deposits in Belgium. Even if the operational expenses diminish every year, they remain high in comparison with the rest of the top 4 panel. BNPP Fortis already took measures in order to enhance the trend, for instance via a reorganization of its management.
For information, the results of the first 2015 quarter of some Belgian banks have been recently published and are excellent. This way, BNP Paribas Fortis records a raise of 6,2% of its net banking product in comparison with the first 2014 quarter, to 894 million euros.
Looking back to the period 2009-2014, we observed that the net profitabilities before taxes of the banks included in our panel do not follow the same direction.
KBC, ING and BNPP Fortis managed to stabilize then enhance the growth of their profitability since year 2009/2010. Concerning the Belgian Net Banking Product, it raised by 4,21% on the period of the study 2010-2014. Except Belfius, all the banks of our panel succeeded to increase their NBP during these last years.
A need of innovation
Despite very satisfying results, Belgian banks are set to operate massive transformation in the coming months and years. Regulatory, economic and fiscal frameworks being unstable and restrictive, revolution of the expectations and processes linked to the client, entry of newcomers in the market are some of the main challenges that Belgian retail banks are facing. All these new factors cause essential changes in the models of revenues and organization.
Belgian banks experiment an exponential raise in the expectations of the customers as well as an increase of the competition by newcomers that are eager to integrate profitable markets through the digitalization. Big banks adapt gradually their offer with innovative products, based on their knowledge of the clients but also via investments in equity, joint-ventures or common investments with the newcomers.
So, Belgian retail banks position themselves strategically on the challenges they are facing now, i.e.:
- big data / client data
Transactional data of the clients constitute a pivot of competitiveness (anticipation of the clients’ needs, new offers…) and security (risk management, frauds…).
Some of the global banks already propose solutions to their clients that include internal or external personalized services (in exchange of the provision of anonymous data to some commercial partners).
Belgian retail banks keep on going with the transformation of their networks of distribution by rebalancing the role of the channels.
Belgian banks tackle to the differentiation of agencies’ formats and to a definition of the “to be” model (free-service, specialization of agencies, extension of the time schedule / night-time shifts etc.).
In comparison with last year, Fortis, Belfius, KBC and ING closed more than 100 agencies.
Belgian banks divide more and more their network of agencies in function of the customers ‘needs. This multi-format approach is often divided by 3 type of categories:
- « Express », including ATM’s for daily common operations;
- « Advisory » with general advisers ;
- « Projects » with specialized advisers.
Moreover, agencies are now interconnected, hierarchically organized and develop multi-channel ways of communication allowing the clients to benefit from long-distance advice, thanks to videoconference rooms.
The average of clients by agency will keep on increasing in the coming years. Should their total clients remain stable, an average agency of BNP Paribas Fortis would cumulate to 4.500 clients in 2016.
The closeness with the client and the satisfaction of this latter will go more and more through other channels.
Customers already integrated the fact that the agency is no longer a place of transactions. Belgian customers are now oriented towards a « self first » model where the agency is no longer at the center.
Digitalization of the consumption models became reality. Bankers now discuss with clients who wish to take care of their money in a simple, intuitive and immediate way. This trend is notably confirmed through the power takeover of Mobile Banking (over the Online Banking).
Mobile phones and tablets are still used as consultative tool (bank account balance, last transactions…). Online Banking remains the reference for transactions and subscriptions. Concerning the agencies, they are solicited for rather complex operations.
Some of the most recent digital initiatives are the following:
- BNPP Fortis develops its digital attractivity via its 100% online bank « Hello Bank ». More than offering optimized services via smartphones or tablets, HelloBank proposes temporary physical contact points (Phygital labs), specific non-banking services (HelloPlay !) or programs related to innovation (Innovators Under 35).
- KBC will launch the first Belgian app on Iwatch, the smartwatch of Apple. KBC is also a pioneer in terms of contactless payment.
- ING proposes to its professional clients a new platform (Business ‘Bank). ING Belgium became the commercial partner of SmartFin Capital, a hedge-funds specialized in financial technologies.
- At the end of 2014, Belfius invested 50 million euros in a new system of relations management in order to enhance the experience of customers via the different canals, IT security, the development of new apps and the improvement of the use of numeric platforms.
- Role of the adviser
Banking advisers will have to adapt themselves to the new models of banking consumption. Increase of commercial meetings, better informed clients with more specific requests, dematerialization of processes via the electronic signature, the use of tablets and videoconferences and review of the remuneration models are few of the upcoming challenges. All of this in a context of cost efficiency, as mentioned above.
The support of these changes constitutes a real challenge for banks. Internal mobility, recruitment of new specific profiles, assistance to the continuous training of employees are essential, as well as a good organization and and a culture adapted to the needs of instantaneousness imposed by the digital era.
To conclude, the management of costs goes through plans for operational effectiveness. BNPP Fortis has especially setup a « Simple & Efficient » plan which aims to realize savings up to 2 billions per year (at group level) as from 2015 through a simplification of the operations (review of processes / simplification of the work, rationalization of IT, dematerialization, simplification of the product offer…).
If the Belgian banking sector demonstrates both healthy and sustainable results, it is crucial for its actors to adapt and rethink their models of profitability in order to position themselves in a market in strong transformation.
Good days of retail banking are still ahead, with constantly bigger margins compared to the other industries. But the actors must develop harder their level of professional competences towards their clients.
An answer to the many described challenges mentioned above would be the reorganization and innovation oriented towards the client. In a country where the quasi totality of the residents own a bank account and where the costs are high, retail banking ensures the sustainability of its margins in the optimization of its resources and in the rationalization of its services.