The Spanish bank Banco Popular has topped the list of Europe's most cost-efficient banks, according to a new study released today by Arthur D. Little. Kaupthing, from Iceland, and Swedish bank Svenska Handelsbanken round out the top of the list, which ranks Europe's largest financial institutions by cost-efficiency based on their cost-income ratio (CIR). British banks HBOS, RBS, HSBC and Lloyds TSB are all included in the top ten, as are Nordic lenders Kaupthing, Glitnir and Sv. Handelsbanken, and Spanish banks BBVA and Caja Madrid.
Mapping efficiency in banking across Europe
The study, which analyzed consolidated data from the major banks in 15 European countries, found that Iceland's banks are the most efficient with an average CIR rating of 41.5 per cent.  German banks, on average, are the least cost-efficient on the continent, with an average CIR of 73.5 per cent.  Spain and the UK follow Iceland in boasting some of Europe's most efficient banking industries with 50.5 per cent average CIR.  Sweden, Norway, Finland and Denmark all also rank above the European average.
Overall, banks in central European countries, such as Austria, Switzerland and Germany, don't perform as well as banks from the north and south of Europe. Banks from the Mediterranean countries appear at all levels in the ranking, with Spain at the top, Italian banks tending towards average cost-efficiency rankings, and French banks showing below-average cost-income ratios. 
"We have gathered this data directly from each bank's official annual report and calculated the CIR to obtain maximum comparability. The report makes for an excellent work of reference for industry practitioners, analysts, public policy makers and scholars to compare relative levels of cost-efficiency and is indeed a source of inspiration for European banks looking for new ways to increase efficiency," explains Dr. Gerrit Seidel, Global Head of Financial Services at Arthur D. Little.
"Spanish, British and Scandinavian banks have proven that they understand customer requirements and are able to operate very efficiently. This high efficiency and the low cost-income-ratios make them the leading institutions among Europe's most efficient banks," says Gerrit Seidel. "French, Swiss and German banks will have special difficulty keeping step with the market's developments in Europe if consolidation in the banking sector and internet use continue to rise as in other European markets. They must extensively change their operating models if they do not want to lose out in the European competition.
Consolidation, branch location and internet penetration affect cost-efficiency
While Arthur D. Little's latest report outlines how individual corporate strategies can impact their cost-efficiency,  the authors also identify country-specific factors that impact cost structures and affect a bank's ability to manage its cost-income ratio.  In the case of the Nordic countries, for instance, high levels of local internet penetration translate into increased cost-efficiency for the region's banking sector, as using online sales and transaction channels minimizes administrative and human resources costs.
The number of citizens per branch in each country is another trigger that impacts the local sector's ability to limit costs.  Branches are an expensive distribution channel, and in countries like France and Germany, where there exists an expectation amongst customers for access to a great number of local branches, the banking sectors tend to perform poorly in the cost-efficiency ranking.
Perhaps not surprisingly, the report highlights that in markets with the most efficient banking sectors, there also tend to be high levels of consolidation.  The German market, for example, has an extremely fragmented banking sector with a high number of both regional and non-commercial banks. With a registered bank per every 34,000 inhabitants in Germany, it is no surprise that its cost-income ratio is so much lower than that of top performer Spain, which has one bank per 213,000 inhabitants.
"Our analysis of the survey's top-performing banks has shown they all share five vital characteristics affecting their cost efficiency: a sound understanding of corporate culture by the management, use of advanced IT systems, an efficient organizational structure with flat hierarchy, shared support functions and decentralization, cutting the right costs on unproductive activities and focusing staff on achieving explicit value increasing targets," reflects Erik Almqvist, Head of Arthur D. Little's Financial Services Practice in the Nordics.
The cost-efficiency ranking survey names the most efficient banks in each market: 

"Whilst cost efficiency must be the company's avowed ambition, focus should not be on cost-cutting, but on profitability. When cutting costs, the focus should be on unproductive and non value-generating activities. A CIR of less than 50% will be the norm in Europe in the years to come. Banks that do not reach this value will face increasing difficulties in sustaining their position," adds Erik Almqvist.
The study also includes case studies of banks that appear at the top of the survey ranking, describing details of their journey to reach the highest levels of efficiency.
"Value in Focus" is now available for download at
www.adl.com/costefficientbanks