McKinsey & Company launched Global Banking Annual Review 2020

• Mckinsey report sets out immediate and medium term ceo agenda to mitigate impact of possible $4tn in foregone revenue over the next 4 years 
• This includes fundamentally reinventing business models to sustain a long winter of zero percent interest rates and other economic challenges, whilst bringing purpose to the fore

McKinsey & Company today released its Global Banking Annual Review, the consultancy’s flagship banking publication. The 2020 report is the tenth edition of the Banking Review and is based on insights and expertise from McKinsey’s Global Banking Practice.

The crisis of 2008 came from within the financial services industry. Today, in this crisis of the real economy, banks are economically afflicted alongside other sectors in society. But banks are also playing an important role in helping society through the crisis: as the conduit for state support, supporting small businesses, companies and individual citizens.

The crisis is delivering, in effect, the biggest stress test to banks, a test which the industry is withstanding to-date, whilst demonstrating resilience and purpose. The impact of the last year without the role the industry has played is likely much deeper.

Going forward, McKinsey anticipates the test presented for banks by the pandemic will evolve in two stages in the months and years ahead. First will come severe credit losses, likely through late 2021; almost all banks and banking systems are expected to survive. Then, amid a muted global recovery, banks will face a profound challenge to ongoing operations that may persist beyond 2024.

• Depending on scenario, from $1.5 trillion to $4.7 trillion in cumulative revenue could be lost between 2020 and 2024. In McKinsey’s base-case scenario, $3.7 trillion of revenue will be foregone—the equivalent of more than a half year of industry revenues that will never come back.
• In that same scenario, return on equity would continue its decline, from 8.9 percent in 2019 to 4.9 percent in 2020 to 1.5 percent in 2021. At the trough in 2021, ROE would fall to −1.1 percent in North America, −1.8 percent in Europe, and −0.2 percent in developed Asia. ROE would fall from higher starting levels and bottom out higher in emerging Asia (2.6 percent), the Middle East and Africa (MEA; 3.7 percent), and Latin America (5.2 percent); and it would take a smaller dip to 8.6 percent in China.

These effects will be felt keenly by an industry already under stress (as set out in recent, previous editions of this report). Midway through 2020 the industry was trading at a 55 percent discount to the broader market, a historical low, with 74 percent of banks trading below book value. This is felt differently across regions: North American banks’ price-to-book ratio at midyear was more than 30 points higher than that of European banks and 15 points above that of Asian banks. These regional differences reflect changes over the past 20 years. In 2000, the roster of the world’s 30 most valuable banks included eight American, 14 European, and just two Asian institutions. In 2019, only a single European bank remained on the list, which now features 15 Asian and six American banks.

Marie-Claude Nadeau, San Francisco-based McKinsey partner and report author said: “Banks will need to act quickly to return to precrisis ROE levels, in a far more challenging environment than the decade just past. The period of zero percent interest rates is being prolonged by the economic crisis and will reduce net interest margins, pushing incumbents to rethink their risk-intermediation-based business models. The trade-off between rebuilding capital and paying dividends will be stark, and deteriorating ratings of borrowers will lead to inflation of risk-weighted assets, which will tighten the squeeze.”

Matthieu Lemerle, London-based senior partner and report author said: “The scale of severity and hardship of the economic impact of this pandemic without the banking industry is unthinkable, but in providing this role to society, the impact on banks themselves has been severe. As this report lays out in detail, answers are available for each of the problems banks will face in the coming ‘long winter’ of zero percent rates continuing to reduce net interest margins, pushing incumbents to rethink their risk-intermediation-based business models; the need to re-build capital buffers and the inflation of risk-weighted assets. We see opportunities on both the numerator and denominator of ROE: banks can use new ideas to improve productivity significantly and can simultaneously improve capital accuracy.”

Jawad Khan, McKinsey’s Banking Practice leader in the Middle East said: “Middle East Banks have also been severely impacted across all levers i.e. margin decline, demand slow down and increased credit losses. However capital and liquidity position remains strong, allowing these institutions to weather the storm. Challenges will remain in the mid-term, but this is the time for banks to re-think their operating model to drive productivity and become even more capital efficient.” 

For the long term, banks need to reset their agenda in ways that few expected nine months ago. McKinsey sets out three imperatives that will position banks well against the trends now taking shape.

• They must embed newfound speed and agility, identifying what worked well in their response to the crisis and finding ways to preserve those practices.
• They must fundamentally reinvent their business model to sustain a long winter of zero percent interest rates and economic challenges, while also adopting the best new ideas from digital challengers.
• And they must bring their broader purpose to the fore, especially environmental, social, and governance issues, and collaborate with the communities they serve to recast their contract with society.

-Ends-

Interview requests. We would be happy to try and arrange interviews with the report author team (with members in Silicon Valley, New York, Vancouver, London and Singapore) plus local in-country spokespeople.

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HyperLinking the full report – McKinsey banking practice asks that, wherever possible, all mentions of the McKinsey global banking annual review in press articles online include a hyperlink to the report landing page on McKinsey.com for readers to access the full work:  www.mckinsey.com/globalbankingreview2020 

© Press Release 2020