Euromoney, October 21 2019
Banks are in an end-of-cycle slowdown from which a third of them may not emerge unless they revamp their models for a digital world – and emerging markets aren’t immune.
This is the sobering conclusion of a new report from McKinsey & Co today, October 22.
“Nearly 35% of banks globally are both sub-scale and suffer from operating in unfavourable markets,” the report says. “Their business models are flawed, and the sense of urgency is acute. To survive a downturn, merging with similar banks may be the only option if a full reinvention is not feasible.”
The report finds that nearly 60% of banks are making returns below their cost of equity – a perilous position if a prolonged economic slowdown takes hold. Globally, loan growth stood at just 4% in 2017/18, the lowest level in the last five years, and 150 basis points below nominal GDP growth.
“While banks have worked hard at reinventing themselves, at this point the outlook is less optimistic than in the past,” Joydeep Sengupta, senior partner at McKinsey in Singapore and co-author of the report, tells Euromoney. “It becomes really challenging at this stage. The bottom quadrant of these banks has to think really hard about what is their future, what is the way in which they will survive?”
One striking element of the report is that emerging market returns are converging with those in the developed world. Global return on tangible equity (ROTE) stands at 10.5%, and it has been around that level since 2013. But emerging market banks have seen their ROTE drop from 20% in 2013 to 14.1% in 2018, at the same time that developed market banks – which have worked on productivity and costs – have lifted from 6.8% to 8.9%.