The strong performance was driven by the lowest level of risk costs on record, according to our 2022 Retail Banking Radar, with the predicted wave of COVID-related loan defaults being mitigated by proactive policies from governments and banks.

However, not a lot changed in bank performance and business fundamentals. While retail banks averted the severe consequences of the pandemic, underlying business indicators—such as revenue per client and cost-to-income ratio (CIR)—did not change significantly.

Retail banks have benefited over the past decade from changing customer behaviors and took the opportunity to decrease the number of both branches and employees. Yet, finding ways to decrease costs even by 1 to 2 percent a year from now on—after a reduction of 25 percent of branches and 12 percent of employees in the past five years alone—will be increasingly difficult.

While 2021 surprised on the upside, the outlook is uncertain. On the one hand, rate increases from the European Central Bank (and other central banks) and the end of the more than decade-long zero-interest-rate policy could provide a boost to bank revenue through an improvement in net interest margins. On the other hand, with inflation hitting multi-decade highs in most of the EU and the UK and with household incomes being squeezed, closely managing costs will remain a key topic for banks. Yet, another windfall—akin to the 2021 provision release— is unlikely. A structured and disciplined transformation of operating models is the main lever retail banks have in their hands to manage through upcoming times of economic difficulty and turmoil.

Spectacular recovery

Pent-up demand and a reversal of risk costs helped European banks perform more robustly than it looked like at the beginning of 2021.

Our 2022 Retail Banking Radar shows that profit per customer across Europe as a whole leaped 43 percent to €214 in 2021 compared with €150 the prior year—the highest figure since 2016. Out of the 21 countries analyzed, Italy and the UK led the way, while only banks in Poland saw their profit per customer drop.

This substantial profit rebound was heavily linked to noteworthy drops in provisions and, to some extent, revenues recovering from the 2020 trough.

Our analysis shows that banks in every one of the 21 countries witnessed falls in risk provisions as a percentage of income, with Italy’s 19.5 percentage point drop being the second highest out of all countries studied and the UK at third with 21.1 percentage points (see figure 1). Both were behind Poland’s outsized 29.6 percentage point fall, which helped the Eastern Europe region outperform its peers with a 17.0 percentage point fall, narrowly above Southern Europe’s 15.5 percentage point drop but well ahead of Western Europe’s 9.0 percent reduction.