European co-operative banks performed well in 2019

Co-operative banks entered the Covid-19 crisis with solid capital buffers, says the paper

European co-operative banks expanded membership, consolidated their domestic market shares and accelerated their loan and deposit growth in 2019.

According to a new report from the European Association of Co-operative Banks (EACB), the banks had a steady membership growth of 1.3% in 2019, to almost 86 million.

Written by Professor Hans Groeneveld of Tilburg University, the paper presents consolidated financial indicators of 18 co-operative banking groups in 13 European countries.

According to the paper, co-operative banks have entered the global health and economic crisis caused by Covid-19 in 2020 with solid capital buffers. The report found that key banking ratios did not differ significantly between co-operative banking groups and the entire banking sector in 2019.

The average Tier 1 ratio of co-operative banks remained at a record level of 15.9, while the same ratio for all other banks almost equalled this level by 15.6 in 2019.

In spite of the membership growth, the number of local or regional co-operative banks dropped by 4.6% to around 2,765 while the branch network of co-operative banks shrank by 4%, a trend witnessed across the banking industry in general, as customers choose online and mobile transactions over branch visits. As a result, headcount at co-operative banking groups also contracted by 1.5%, while total bank employment dropped by 0.5%.

Co-operative banks also consolidated their average domestic market shares at the record level of 2018. The loan and deposit market share stabilised at 23 and 21.9, respectively whole their branch market share climbed to 33.2.

The banks also experienced a strong loan and deposit growth, which the report partially attributes to strong economic growth and loose monetary policy.

Co-operative banks recorded the highest loan expansion since 2007 – 6.1%, above the 3.5% average for the banking sector in general. Furthermore, since 2011, co-operative banks granted the non-financial private sector 28% additional loans while the credit volume of other banks was just 3% higher than in 2011.

Co-operative banks’ deposits increased by 6.4%, while other banks experienced deposit growth of 3.5%. Over the period 2011-2019, the average annual deposit growth of co-operative banks amounted to 4.1% compared to 2.2% of other banks.

The report also argues that co-operative banks entered the covid-19 pandemic of 2020 at least with a solid capital buffer. In 2019, the average Tier 1 ratio of co-operative banks remained at exactly the same high level as in 2018: 15.9.

Between 2002 and 2019 co-operative banks also had a stable average return on equity of 6%, a trend experienced by other banks as well.

“It is essential to understand the business model of co-op banks, to explain their strengths and weaknesses to compare them with their competitors. This is all the more necessary in the current economic context linked to the pandemic,” said EACB managing director Hervé Guider during a webinar on the key findings of the report.

The webinar featured Prof Groeneveld, who highlighted that members form the cornerstone of co-operative banks. Co-op banks have had an average member growth of 2% since 1997, he said, arguing this proved the sector’s popularity and attractiveness, particularly since becoming a member is no longer compulsory in order to secure a loan from co-op banks.

Furthermore, since 1997 co-op banks have seen their member/population ratio grow to 20%. This means that one in five inhabitants in the 14 countries are members of co-op banks. “They are a very important economic force in these countries,” he added.

A key challenge for the sector is ensuring they remain engaged at local branch level and keeping members involved in spite of the number of branches decreasing.

Estimating on what next year’s report might reveal, Prof Groeneveld said that while co-op banks had shown more resilience than other banks during the 2008 crisis, the current Covid-19 crisis is affected the real economy, and could have a negative impact on the sector.

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