Ekmel Cilingir, the Chairman of the Supervisory Board of European Merchant Bank UAB (EMBank), has released an insightful analysis of the European banking sector's current state and future trajectory. This comprehensive review, authored by Ekmel Cilingir, Chairman of the Supervisory Board at EMBank, underscores the critical juncture at which European banking finds itself in 2024.
A Resilient Past, a Challenging Future
Despite significant challenges in 2023, including geopolitical conflicts and the climate crisis, European banks demonstrated notable resilience. The sector saw an increased return on equity, reaching 10.9%, up from 7.68% in the previous year. Furthermore, the fully loaded CET1 ratio stabilised around 15.8%, underscoring strong capital adequacy.
However, 2024 presents a landscape of both opportunities and challenges. Regulatory changes such as CRD6 and the Digital Operational Resilience Act (DORA) are set to reshape the sector. These regulations demand higher capital adequacy and recalibrated risk management frameworks, pushing banks to allocate more resources towards compliance and good governance.
Adapting to Societal Shifts
Cilingir highlights the pressing need for European banks to adapt to societal and demographic shifts. The increasing demand from Gen Z for more digital, seamless, and personalised banking services necessitates significant investment in technological renewal. At the same time, banks must ensure financial inclusion for senior citizens and rural populations who still rely on traditional banking methods.
Navigating Financial Pressures
The traditional banking model faces pressure from diminishing net interest margins. The expected environment of lower interest rates on loans and competitive pressures to offer higher returns on deposits threatens profitability. Banks are thus compelled to explore alternative revenue streams and cost-reduction measures.
Moreover, potential recession and liquidity concerns add to the complexity. As Çilingir notes, "The ability of banks to manage short-term obligations becomes critical in an environment where rapid shifts in depositor behaviour can occur."
Embracing Technological Transformation
A significant portion of European banks operate on outdated IT systems, posing operational risks and inefficiencies. Upgrading these systems is essential, albeit costly and complex. Cilingir remains optimistic, stating, "The nature of new tech and AI tools might make systemic overhauls easier than imagined, making an investment not only imperative but smoother compared to previous paradigms."
The Role of Fintech Collaboration
Collaboration with fintech institutions presents a significant opportunity for legacy banks. By leveraging fintech's agility through Banking-as-a-Service (BaaS), banks can offer a wider range of services and reach a broader audience. Open Banking further facilitates this partnership, allowing banks to share core functionalities securely with fintech firms.
Looking Ahead
In the first quarter of 2024, European banks have shown robust performance with strong capitalisation and improved liquidity. However, early signs of credit quality deterioration and subdued loan growth due to tighter lending standards indicate potential challenges ahead. The European Central Bank is expected to lower interest rates later in the year, which could impact profitability amidst ongoing geopolitical tensions and economic disruptions.
Cilingir concludes, "European banks are indeed at a crossroads. The path forward will likely be marked by those institutions that can turn pressing challenges into opportunities for reinvention. Banks need to go beyond responding to immediate stakeholder demands and embrace new technologies, revisit customer engagement strategies, and rethink their traditional banking models."
About European Merchant Bank
European Merchant Bank UAB (EMBank) is a leading licensed bank in Vilnius, Lithuania. Founded by Dr. Ozan Ozerk, EMBank is dedicated to driving digital transformation and innovation in the banking sector. With a focus on regulatory compliance and customer-centric services, EMBank aims to redefine banking for the modern era.
For a detailed exploration of these insights, they can read Ekmel Cilingir's full article on LinkedIn: A Transformative Year: European Banking at the Crossroads.
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Company Name: European Merchant Bank (EMBank)
Contact Person: Dilek Isik
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Country: Lithuania
Website: https://em.bank/
