July 16, 2012 / 11:04 PM / 5 years ago

Europe retail bank profits to sag on rules -McKinsey

LONDON, July 17 (Reuters) - The profitability of retail banking in four of Europe’s biggest countries will fall by about 40 percent due to a raft of new regulations if banks do not take measures to mitigate the impact, according to a new study.

Return on equity from retail banking in Germany, Britain, France and Italy will plunge to an average of 6 percent, from 10 percent, if new global, regional and national regulations take effect, management consultancy McKinsey said on Tue sday.

RoE in Germany will fall to 4 percent from 7 percent and in Italy it will drop to 3 percent from 5 percent, McKinsey estimated. In Britain it will halve to 7 percent, and in France it will drop to 10 percent from 14 percent.

McKinsey said it analysed the impact of 39 new sets of rules on a range of retail banking products and assumed that banks took no action.

However, banks are taking mitigating action to plan for compliance with the new rules and adjusting their business models.

“While we think it unlikely that the industry will return to pre-regulation RoE levels in the short to mid-term, individual banks can do so if they take certain actions,” said Philipp Harle, McKinsey director and one of the report’s authors.

The changes look certain to affect revenues, profits and margins, the study said.

Basel III capital and liquidity rules will have the single biggest impact, but there is a cumulative impact of initiatives.

The report said throughout Europe, those banks that qualify as global systemically important financial institutions will be subject to additional rules, which will lower RoE by another 0.4 to 1.2 percentage points.

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