Following a year of record profits in 2023, European banks have posted a drop in gains during the first three months of 2024. For example, Lloyds Banking Group reported a 28% year-on-year fall in profits between January and March – from £2.3bn to £1.6bn. This was broadly in line with analysts who forecasted a first quarter-profit of £1.7bn. The reason for the dip, according to Lloyds, was a combination of increased business costs and lower net interest income.

Natwest Group has followed a similar trajectory, with profits falling by almost 28% to £1.3bn in Q1 2024, while Barclays posted a 12% drop during this period. Yet despite the gloomy first quarter, Fitch Ratings says Europe’s largest banks will report “sound profitability” in 2024, with only a “slight weakening” due to “moderately higher” loan impairment charges and costs. The global ratings agency expects that operating profit/risk-weighted assets ratios will average 2.6%, down from 2.7% in 2023. This prediction is based on interest cuts playing out gradually rather than abruptly, and good asset quality performance.

That said, Fitch warns that”profitability trajectories will differ among banks, reflecting varying balance sheet dynamics, deposit pass-through rates and interest-rate hedging strategies”. Meanwhile in the US, S&P Global reports that analysts are warning of possible “sequential declines in earnings per share at eight of the 15 publicly traded banks with more than $100 billion of assets” as net interest income comes under threat.

A time to focus on growth strategies and business development opportunities

Weighing up 2024’s first quarter performance, it’s clear that banking leaders urgently need to develop new growth strategies to counter the impact of falling interest rates. In fact, there are a range of challenges that will need to be taken into account as part of this work. As well as sliding interest income, banks face new regulatory pressures arising out of the failures of Silicon Valley Bank and Credit Suisse in 2023, and customer demand to accelerate digital transformation.

According to Accenture’s Commercial Banking Top Trends for 2024 report, a core area of regulatory focus this year will be capital optimisation. This will cut across management of prudential risks, ESG and tech innovation. Consequently, we can expect new capital requirements and impacts on product portfolios. Consultants KPMG also describe how “tighter regulation” is aiding a rapid evolution of banking. Its survey of 400 commercial banking leaders found that embedding regulation in the development of new technologies was key to building trust with customers.

On the topic of new technologies, the big story of the past 12 months has been artificial intelligence. There’s no doubt this area of innovation has stolen the limelight from fintech, whose funding nosedived after investors started to demand profitability over growth. Perhaps fintech’s mission now is less about building the next big neobank or expense management platform. It’s more about providing effective tools that automate processes and use artificial intelligence to provide powerful insights. 

This makes cooperation rather than competition between traditional financial institutions and newcomers imperative. In fact, the trend of banks and fintechs favouring partnership over rivalry was already well established prior to the economic downturn. As leadership teams look for future growth opportunities, this is sure to expand.

A partnership approach: principles for banking growth in the years to come

Working with fintechs goes far beyond automating and digitising existing processes and products. Although that is a vital part of the equation. Bank bosses mulling tomorrow’s sources of earnings in an age of falling interest rates should also be looking at technology as an enabling force in terms of serving new markets. That’s because businesses which have previously shied away from offering certain products due to a lack of infrastructure or human resources may find that there are easily attainable solutions to such challenges. For example, with modern SaaS propositions banks don’t have to build on-premises infrastructure.

Encouragingly, many digital tools for commercial banking have been created by industry veterans. These are people who understand the challenges and have stepped outside to innovate, free from large-corporate inertia. This is very much Aronova’s story and it has enabled us to build a workable receivables finance proposition, powered by AI and machine learning. By partnering with these modern and knowledgeable banking tech providers, financial institutions can take the sign marked ‘growth’ as they navigate this historical crossroads.

Ready to learn more?

Contact us and find out how our solutions are helping financial institutions to overcome barriers and offering new products and services.

Like this enough to share it