Thanks to reader Mike

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By Kevin Helms

Management consulting firm McKinsey & Company has published a global banking review and found that a majority of banks worldwide may not be economically viable. More than half of them still do not generate their cost of equity 10 years after the crisis and may not survive an economic downturn.
Majority of Banks ‘Destroy Value’

McKinsey & Company published its Global Banking Annual Review 2019 this week. The 58-page report highlights concerns over the health of the global banking sector. The firm groups banks worldwide into four broad categories, noting that “Every bank is uniquely bound by both the strength of its franchise and the constraints of its markets or business model.”

The first category is “market leaders” which are the top 20% of banks globally that capture almost 100% of the economic value added to the entire industry. The next is “resilients” which are nearly 25% of banks that have maintained leadership in challenging markets such as Europe.

The other two categories consist of troubled banks. About 20% of them are classified as “followers” which are those that have not achieved scale and are weaker than their peers, the report describes. “They are at risk from a downturn and must act promptly to build scale in their current businesses, shift business models to differentiate, and radically cut costs.”

The last category, “challenged banks,” comprises about 35% of banks globally that are both sub-scale and suffering from operating in unfavorable markets, McKinsey explained, asserting:

Their business models are flawed, and the sense of urgency is acute. To survive a downturn, merging with similar banks or selling to a stronger buyer with a complementary footprint may be the only options if reinvention is not feasible.

McKinsey found that a majority of banks globally may not be economically viable.

The firm further noted that “Risk costs are lower than ever, and yet 60 percent of banks destroy value.” These banks still do not generate their cost of equity 10 years after the crisis, McKinsey detailed, adding that “Imaginative institutions are likely to come out leaders in the next cycle” while “Others risk becoming footnotes to history.”
Time Is Running out for Many Banks

The report also outlines trends affecting the banking sector globally such as the increased usage of online banking, which grew by 13% from 2013 to 2018, according to McKinsey. The firm believes that there is room for further growth of more than 30% in many markets as consumers are increasingly willing to transact online. The rise in popularity of non-bank service providers has also presented new competition to traditional banking.

“Consumers have become accustomed to real-time and personalized services and expect the same of digital banking solutions,” the report explains. While this has mostly impacted retail banking and asset management, the same trends have started to emerge in corporate banking as well as in capital markets and investment banking, McKinsey emphasized, elaborating: