Economics of Finance: Belgian Banking Sector

• The following notes are for Economics of Finance and Risk Management (LECON2331), Academic Year 2024-2025.

Agenda Overview:

• How the financial system works.
• The structure and organization of financial markets.
• Financial intermediaries and financial institutions.
• Banks as financial institutions (intermediaries).
• Banking business models.
• An overview of Belgian and European banking sectors.
• Banks and the transmission of ECB monetary policy.
• The 2007 Financial Crisis.

Belgian Banking Sector Overview:

• At the end of 2020, the four major players in the Belgian banking sector (BNP Paribas Fortis, KBC, Belfius, ING) accounted for 67% of the sector's total, based on the unconsolidated cumulative balance sheet.
• The percentage share of the top 5 banks in total assets indicates the level of concentration in the sector.
• Generally, this share is higher in smaller countries.
• The number of banks in Belgium has decreased considerably from December 2008 to December 2023.
• As of December 2023, there were 78 institutions operating in Belgium.
• The share of total assets of the five largest credit institutions in Belgium has fluctuated between 1999 and 2023.
• The percentage of assets held by the largest banks tends to be higher in smaller countries.
• The banking sector in the Netherlands is more concentrated than in Belgium.
• In 2023, the assets of the 5 leading banks represented 72.68% of the total assets, which indicates the degree of market concentration.
• The Belgian banking population is more international than in neighboring countries.
• In Belgium, 81.5% of banks are of foreign origin (18.3% with Belgian majority shareholders).
• This is compared to 37% in France and only 9% in Germany.
• The low level of German banks is due to the high number of 'Lander' banks.

Belgian Banking Sector - Financial Intermediation:

• Belgian clients (households, businesses, and governments) hold more than €663 billion in deposits in banks established in Belgium, mainly in savings and sight deposits.
• Belgian banks have outstanding loans of almost €530 billion to Belgian households, businesses, and governments with over 85% of the credit granted to the private sector.
• In 2024, the interest expenses of households and businesses rose, impacted by loans at higher rates since the summer of 2022.
• There is an outstanding amount of deposits held with Belgian banks, amounting to 108.5% of GDP at the end of 2023 which defines Belgium as a 'deposit country.'
• This is slightly higher than the euro area average of 105.5%.
• At the end of 2024, outstanding savings accounts would stabilize at +/- €277.6 billion (€300 billions at the end of 2022).
• In December 2024, outstanding savings accounts increased by €5.36 billion.
• Households mainly drew from their bank accounts to subscribe to the 1-year State note.
• This resulted in a considerable outflow of funds for banks in Q3 2023.
• Around 6% of the outstanding amount of household deposits flowed out of the banking system during that quarter.
• The loss of stable retail deposits heavily impacted the funding base, interest margin, and profitability.
• Saving accounts continue to provide a large and stable funding source for credit.
• Belgian regulated savings accounts shrank considerably in August and September 2023.
• The total amount outstanding stood at €268.92 billion at the end of September.
• Between June and November, savings accounts had dropped by €34 billion.
• In December 2023, Belgian regulated savings deposits rose by €2.7 billion to €268.9 billion, compared with €266.2 billion at the end of November.
• There was a large drop in savings in 2023, becoming the biggest drop since the NBB began publishing statistics in the early 2000s.
• The 1-year State bond attracted €21.9 billion, of which €19.1 billion came from the 5 largest Belgian banks, i.e. 87%.
• ING accounted for €2.5 billion.
• BNP Paribas Fortis accounted for €6.9 billion.
• KBC accounted for €5.7 billion.
• Belfius for €3.5 billion.
• Crelan (Crelan, AXA and Europabank) for €1.2 billion.
• Bonds and term accounts, offering better returns than traditional savings accounts, gained popularity.
• Total deposits on the regulated savings accounts of nine Belgian banks fell by 10.5%.
• Extrapolated to the market as a whole, deposits on savings books fell by €31.5 billion to €268.8 billion in 2023.
• Together, the four main banks saw 20 billion outflow since last December.
• BNP Paribas Fortis : €61.78 billion (-5 billion)
• KBC : 50.39 billion (-6.78 billion)
• Belfius : 42.9 billion (-5.3 billion)
• ING: 31.8 billion (-3.1 billion)
• Most of the $22 billion invested in the 2023 State bond has been re-allocated to term accounts and savings bonds.
• The total amount of Belgian savings accounts fell by €4,7 bio in September 2024, to 270.9 billion euros.
• Investments in competing investments, new government bonds, attractive interest-rate term accounts, and savings bonds caused the shift.
• Smaller banks also increased the interest rate on term accounts (MeDirect, Crelan, Deutsche Bank, Argenta, Beobank ).
• 'Temporary' offers impacted funding costs for some financial institutions such as Argenta.
• This has caused a potential general increase in mortgages rates.
• 12% of savers who have deposited more than €75,000 hold half of the €300 billion in regulated saving accounts.
• The 41% of 'small' depositors (€1,000 to €10,000) collectively own just 5% of the total, or €15 billion.
• The distribution of savings accounts is as unequal as the distribution of all household assets.
• The loan-to-deposit ratio is relatively low in Belgium (93.9%) which reflects banks having a strong liquidity position.

Belgian Banking Sector - Operations and Services:

• There is an evolution of services towards digitization
• As of 2022 there were 3,243 bank offices, compared to 4,232 as of 2020.
• Internet banking subscriptions were at 15.4 million in 2022.
• Mobile banking subscriptions were at 13.0 million in 2022.
• There were 4.0 billion online sessions per year in 2022.
• Credit transfers were at 1.8 billion in 2022.
• Card payments were at 3.6 billion in 2022.
• Cash withdrawals stood at 137.8 billion in 2022.
• By the end of 2024, there were approximately 3,000 bank agencies in Belgium, compared to 12,750 in 2000.
• There has been a decrease in the number of agencies, mainly within large bank networks, between 2013 and 2023.
• Customers are deserting physical locations with increasing digitization and the rise of online banking and smartphone apps.
• Some smaller retail banks are however still opening new agencies and continue to extend their network.
• The role of agencies has evolved considerably for example, BNPP Fortis created a "transactional" network (via post offices).
• By the end of 2023, Belgians could use almost 2,300 self-banking machines and over 4,000 ATMs,
• It is a strong reduction on the 3,500 self-banking units and over 6,400 ATMs available by the end of 2020.
• By 2023, almost 70% of cash points were located in Flanders, 24% in Wallonia and around 6% in Brussels, indicating uneven distribution.
• Batopin is an alliance of Belgium's leading banks for ATM management, is committed to having at least one ATM in every commune by 2024.
• By the end of 2025, there will be 970 cash points nationwide, with a total of more than 2,510 ATMs.
• The goal is for 95% of Belgians to find an ATM within five kilometers of their home by 2030.

Belgian Banking Sector - Operations and Services:

• Banks are constantly monitoring and improving their cost efficiency in today's highly competitive environment.
• In recent years, banks improved their cost/income (Ctl) ratio which fell from 72.1% in 2012 to 59.5% in 2023.
• It indicates a significant improvement in cost efficiency and around 58% in 2024.
• The cost to income ratio is under pressure with high inflation impacting salaries, decreasing intermediation revenues and bank digitization.

Belgian Banking Sector - Performance:

• Belgian banks have managed to develop solid profitability, averaging an 8-10% return on equity in the years 2015-2019.
• Over three quarters of 2023, profitability was at 12.5%.
• In 2020, partly due to Covid-19, profitability was lower, at 5.9%.
• In 2021, it rose to a level of 10.2%.
• Key challenges are digital transformation/energy transition.
• Banks accounts for 2/3 of Belgian banks' income as net interest income (NII).
• NII was under pressure during the period of low interest rates and on the stock of deposits was sharply reduced.
• This was due to deposit rates hitting the 0.11% floor.
• An increase in the lending volumes during the period of low-interest rates will compensate for the fall in their interest margins.
• Banks are limited from being able to increase NII over the coming quarters due to reduced profitability of financial intermediation.
• This is because of the yield curve getting inverted.
• The sector's strength can in part be described: the banking sector posted a return on equity of 12 % in 2023. The financial sector is one of the strongest in Europe with significant capital and liquidity reserves.
• The good performance was supported by higher interest income and maintenance of low provisions for credit losses.
• Banks have liquidity buffers that can be mobilized during liquidity pressures.

Belgian Banking Sector - Ratios:

• Net interest income: 14.6(2019), 14.2(2020), 14.4(2021), 15.3(2022), 18.1(2023).
• Non-interest income: 8.5(2019), 8.2(2020), 7.6(2021), 7.9(2022), 8.1(2023).
• Net fee and commission income: 5.6(2019), 5.6(2020), 6.4(2021), 6.5(2022), 6.7(2023).
• Net realized and unrealized gains and losses on financial instruments: 0.5(2019), 0.0(2020), 0.6(2021), 0.8(2022), 0.2(2023).
• Other non-interest income: 2.4(2019), 2.6(2020), 0.6(2021), 0.6(2022), 1.2(2023).
• Operating income: 23.1(2019), 22.4(2020), 22.0(2021), 23.2(2022), 26.2(2023).
• Operating expenses: -13.7(2019), -13.8(2020), -13.3(2021), -14.2(2022), -15.3(2023).
• Gross operating profit: 9.4(2019), 8.6(2020), 8.7(2021), 9.1(2022), 10.9(2023).
• Impairments and provisions: -1.3(2019), -3.1(2020), -0.2(2021), -1.1(2022), -0.7(2023).
• Other components of the income statement: -2.0(2019), -1.2(2020), -0.7(2021), -0.3(2022), -0.8(2023).
• Net profit or loss: 6.1(2019), 4.3(2020), 7.8(2021), 7.6(2022), 9.3(2023).
• Return on equity (in %): 8.7(2019), 5.9(2020), 10.2(2021), 10.0(2022), 12.1(2023).
• Return on assets (in %): 0.6(2019), 0.4(2020), 0.7(2021), 0.6(2022), 0.8(2023).
• Cost/income ratio (in %): 59.5(2019), 61.7(2020), 60.4(2021), 61.0(2022), 58.4(2023).

Belgian Banking Oath:

• The Belgian banking oath and the related disciplinary regime were introduced in the law of 20th December 2023.
• The banking oath applies to credit institutions as well as banking and investment services agents.
• It targets employees in independent management or supervisory positions, as well as for bankers in contact with customers.
• The FSMA is responsible for ensuring respect and enforcement of the oath.
• It is based on several pillars.
• Development of ethical rules (honesty, integrity, competence, professionalism).
• Interests of clients and fair treatment.
• Oath to respect these rules.
• Possibility for FSMA to impose disciplinary sanctions.
• Establishment of a central register of disciplinary sanctions and professional bans.
• Requirement to present a certificate attesting to the absence of a professional ban before any recruitment.
• These ethical rules are now 'carved in stone' (in law) and associated with a disciplinary system, due to the introduction of the banking oath.
• The banking oath regime is due in 2 phases.
• January 15th, 2025 for 'fit and proper' persons (members of management committees) and senior executives working in credit institutions.
• July 15th, 2026 for other 'providers' of banking services.
• Three disciplinary sanctions are provided for those who fail to take the oath. Suspension, warning, or professional ban up to 3 years.

European Banking Sector:

• The downward trend in the number of EU-27 credit institutions, which began in 2009, continued with the number falling to 4,927 in 2023 (-148 units).
• A total of 3,044 (-38.2%) have been reduced since the beginning of the contraction in 2009.
• Covid-19 consolidation trend had no tangible impact in 2021.
• Consolidation in the banking sector continues to help reduce overcapacity and aims to improve profitability.
• Biggest contraction in 2023 in Germany (-56) and Austria (-21), followed by Finland , France, and Italy.
• EU banks' ROE as of 2023 was 8.6%.
• All countries have consecutively had a positive ROE over the past two years, with twenty-three of them having a double-digit ROE.
• In 2023 the countries that experienced a single-digit ROE were Germany, France, Ireland, and Luxembourg.
• ROE of EU countries diverged after 2007, with increasing fragmentation.
• The ECB's key interest rates boosted banks' interest margins, which had already heavily grown in 2023 providing important cash reserves.
• National authorities don't always consider this positively, since banks are profitable and public deficits are on the rise. A range of governments decided to sell off holdings from the bailouts of the financial crisis in 2008.
• For 2025, experts expect this wave of consolidation to continue so that European banks can compete with US banks.
• There is a lack of uniformity between European countries in terms of regulations, taxation and banking products.