6 essential value drivers in banking for 2023 amidst bleak economic outlook

A new study has suggested that the global banking sector is facing a troubled future, with the economic outlook facing potential downturns such as a possible recession. With a gloomy environment, the sector is looking at possible areas that can spur growth. 

In this line, research published by Banking Hub on January 30 has identified six value drivers for the banking sector in 2023. 

These value drivers include return on risk-weighted assets (RORWA), return on assets (ROA), cost-income ratio (CIR), non-performing loans as a percentage of total loans (NPL ratio), loan growth rate, and average GDP growth in the bank’s markets.

Indeed, the first three value drivers, RoRWA, ROA, and CIR, are classic profitability and efficiency indicators that help measure the bank’s financial performance and provide insight into its operational efficiency. Elsewhere, the NPL ratio measures the bank’s credit risk and helps gauge its loan portfolio quality.

At the same time, the loan growth rate and GDP growth in the bank’s markets are two growth parameters that play a critical role in a bank’s performance. The loan growth rate indicates the bank’s ability to expand its lending operations and generate revenue. In contrast, GDP growth in its markets reflects the overall economic conditions and the potential for business growth.

Impact of a possible recession on banking sector 

The research highlighted some of the critical implications of a recession on the European banking sector. According to the study: 

“An environment with strong macroeconomic growth rates has been essential for a bank’s success in the past. So, a recession and weak growth rates in the countries of Europe in the coming quarters will make it much more difficult for the institutions to generate value.”

Furthermore, the study noted that the top 100 banks performed slightly better than the overall market, with a Total Shareholder Return (TSR) performance of +2.3% quarter-on-quarter (QoQ) in the last quarter of 2022. 

However, the performance varied significantly across different regions, reflecting the different economic conditions and challenges faced by banks.

For instance, Western European banks saw a strong rally in Q4 2022 with a TSR performance of +16.4% QoQ. Meanwhile, U.S. banks had a slightly better performance than the overall market, with a TSR of +3.2% QoQ. 

For Western European banks, Germany’s Deutsche Bank was the top performer with a TSR of 41.5, followed by Erste Group from Austria at 32.1. Dutch-based ING ranks third at 28.6. Other top performers include Italy’s Unicredit and Intesa Sanpaolo. 

Switzerland’s Credit Suisse was the lowest performer, with a TSR of -28.3. Other low performers include Lloyds Banking (8.5), Standard Chartered (8.6), Barclays (8.7), and HSBC (9.2). 

The study noted that the performance of Western European banks contributed significantly to uplifting the top 100 lenders.