The global banking sector is back to health: to say it is the new study Global Banking Annual Review 2017 by McKinsey, which analyzes the performance of the banking sector worldwide and which argues that the recovery from the financial crisis has been completed, capital stocks have been replenished and banks have cut costs. However, according to McKinsey, profits remain slim. For the seventh consecutive year, the industry's return on equity (ROE) is stuck between 8% and 10%. 2016 closed with a ROE of 8,6%, one percentage point less than in 2015. Furthermore, the shares of the banks are traded at low multiples, which suggests that investors remain concerned about the future profitability of institutions.
There are differences in performance across regions and lines of business, and even between institutions: those who have outperformed have done so thanks to a clear strategy and constant application to both core businesses and areas for improvement. It must be emphasized that regional differences are less and less: if in 2010 these accounted for 74% of the performances, in 2017 this value dropped to 39%.
With the recovery of interest rates and the coming into play of other favorable factors, the ROE of the sector could reach 9,3% by 2025, according to the McKinsey study. But if retail and corporate customers moved from traditional banks to digital companies at the same rate that people have adopted new technologies in the past, ROE could fall by around 4 points, to 5,2% by 2025, in the absence of mitigating actions.
Banks that have not yet gone digital need to explore the new tools at their disposal as soon as possible and build the digital marketing and analytics skills needed to compete. If the majority of the industry takes this route, the banks combined would add about $350 billion to their balance sheet. This would lead to an average increase in ROE of around 2,5 percentage points. Digital transformation at scale is essential, not only for the economic benefits, but also because it will offer the possibility to participate in the next phase of digital banking.
“Platforms” like Alibaba, Amazon and Tencent are renovating one industry after another, blurring the boundaries between sectors because they want to offer everything to everyone. If this integrated economy also begins to emerge for banks, there will be opportunities for those who have built digital skills and have been able to move quickly. Banks that have successfully orchestrated this “ecosystem strategy,” building partnerships and monetizing on data, could drive their ROE to 9%-10%. Banks that go further, creating their own platforms, could enter non-bank markets, which would raise their ROE to around 14% – well above the current industry average.
Attachments: MCKINSEY – Global Banking Annual Review
