Bank income is likely close to its peak—at least in the near term. We believe 2023 is likely to see the top of the net interest margin expansion cycle as the loan book repricing feeds through and as rising interest rates level off or perhaps go into reverse. Higher interest rates have already slowed mortgage lending across many countries. Both in the Euro area and in the UK, the volume of new mortgage loans fell 50 percent between March 2022 and February 2023. Furthermore, the latest bank failures will likely result in more caution on the part of the banks and hence a slowdown in credit creation, and we could see an increase of risk provisions. The combined impact of the outlook on interest margin and loan volumes suggests that banks’ toplines have likely peaked or will peak this year with another +5 percent on total income per customer.

Amid persistent inflation, it’s time to focus on cost management. The impact of inflation has not yet been felt in the banks’ operating expenses because of a combination of fixed price contracts and a timing lag in cost increases, such as salaries. Across countries, salaries are going up by about 5 to 10 percent, indicating that without any action, operating expenses could see rises in the high single digits. To stay below inflation cost increases, banks will need to take out €10 billion to €20 billion from their underlying cost base, which is a challenge since most of the quick wins have already been delivered.

Three ways to gain a competitive advantage

No doubt, 2022 was a record year, but maintaining this performance could prove to be difficult. Banks will have to navigate some tricky macroeconomic conditions while maintaining trust and confidence. At the same time, they will have to address their customers’ changing behaviors and react to competition from neobanks and fintechs—a topic that we will explore in our next article.

Three moves can help forward-thinking banks stay ahead of the game:

Maintain customer trust with a transparent information policy, fair pricing, seamless interactions, personalization and relevance for customers’ financial lives, and support to help customers make the best financial decisions.
Work diligently to contain and lower costs, which will become even more challenging in an environment with much higher inflation than in the past 10 years. The need to attract and retain top talent will be a non-negotiable for many institutions, yet the costs will be a challenge.
Capitalize on the opportunity presented by rising interest rates and better margins to make strategic investments in technology and digitalization, which might have been difficult to commit to in the past.

Stay tuned for more articles in this series

This is the first in a series of articles to be published over the coming months where will explore changes in customer behaviors, the evolving use of channels, and the rise of embedded finance. In addition, we will focus on environmental, social, and governance (ESG) issues, exploring the most pressing challenges and how banks should respond.

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