The fund said the £27trillion ($35trillion) of assets held by 172 large European banks are being affected by “system-wide challenges” that could wipe out their profits.
A new IMF report issued yesterday ahead of their spring meetings in Washington paints a bleak picture for banks that cannot adapt to change.
And worryingly the IMF, which is run by former French Finance Minister Christine Lagarde, who earns more than £300,000-a-year and pays no tax, is encouraging banks to close branches as the fund tries to cope with the cost of its own mismanagement which could lead to a serious knock-on effect in the sector.
The report says: “Some banking systems have also been reducing costs by cutting excess capacity. Banking systems in Denmark, the Netherlands, and Spain, in particular, have seen larger percentage reductions in branches and employees.
“Rationalising branches, so that the ratio of deposits to branches of each sample bank at least reaches the European average, could reduce operating expenses by about $23billion overall, equivalent to 23 per cent of after-tax profits for the banks considered here.”
The IMF also warns that policy decisions as well as political uncertainty across Europe will impact growth as they call for a more integrated “full-fledged banking union”, despite widespread scepticism of the plan across the continent.
The IMF’s Global Financial Stability report says European banks are not performing as well as those in the rest of the world.
It says: “Although the challenge of bank profitability is widespread, domestic banks (banks with more than 70 per cent of revenues or assets in their home market) as a group struggled especially with profitability in 2016.
“Overall, three-quarters of domestic banks in our sample had a weak return on equity, compared with about 65 per cent of sample global banks and just 15 per cent of Europe-focused banks.”
European banks are having major issues across the sector with Non Performing Loans (NPL) making up much of their risky assets.
And while the IMF report says there is a level of optimism over a cyclical upturn in equity prices – it is unlikely to prove to be their saviour.
The report continues: “European bank equity prices have risen on optimism about a cyclical upturn in the economy and some further steps toward resolving weak banks.
“However, a cyclical recovery is unlikely to be sufficient to restore the profitability of persistently weak banks, and more needs to be done to improve resilience.
“The system-wide structural impediments—characterised by operational inefficiencies, weak business models, inefficient allocation of credit, excess capacity, and a large legacy of bad debt—pose challenges, particularly for domestically oriented banks.
“Large international banks are also affected by these system-wide challenges, and unless these impediments are removed, business model restructuring alone is likely to be insufficient.
“More systematic and comprehensive policies are needed to…