International Finance

European private banks see worst drop in profit since 2008

Reduced investor inflows, rising costs and a weakening financial market led to the profit drop

Private banks in Europe has witnessed the worst year in terms of profits since the financial crisis in 2008. Some of the reasons for the profit drop are reduced investor inflows, rising costs, and the weakening financial market, according to McKinsey.

According to the McKinsey report, profits of the private banking sector in Western Europe dropped by 8 percent from €15.4 billion in 2018 to €13.5 billion. While the banks in Western Europe recorded a profit drop, private banks in the US and Asia recorded a 5 percent increase in their profits during the same period.

Sid Azad, a partner at McKinsey, told the media that, “Private banks will need to reconfigure their business model to operate in a market with weaker asset growth and decreasing profit margins.”

He also highlighted that the fall in profit in Europe’s private banking sector happened for the second time in the last three years.

A major problem faced by the private European bank is their inability to tackle rising cost. Cost inflation is also on the rise, increasing by about 4 percent annually for the last five years. The operating cost for the banks has also increased substantially despite investments in technology.

Management consultancy firm McKinsey suggests small or medium-sized banks in Europe could cut costs through mergers, acquisitions, and also by creating a platform to merge their back-end operations.

While the private European banks underperform, their counterparts in the US are dominating the global market. According to reports, banks in the US earned about 62 percent of the global investment banking fees last year.
Meanwhile, in Europe, Germany’s Deutsche Bank plans to let go around 1000 of its employees. Similarly, Switzerland UBS Group stopped operating in the US to focus on its roots as a private bank.

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