Crisis could claim 60% of world's big banks

Geography, scale, differentiation, and business model are among the causes, McKinsey states

A new survey from US consultancy McKinsey & Co has found that over 60% of banks globally may not be economically viable to survive a major financial downturn, with those in western Europe and Asia most at risk.

To make such assessment the study looked at 1,000 banks in developed and emerging countries and estimated that just over a third had made a return on capital of just 1.6% over the past three years. This compares to returns of just over 17% for top banks over the same period.

"Nearly 35% of banks globally are both sub-scale and suffer from operating in unfavourable markets", as well as having flawed business models, said McKinsey.

In addition, more than half of the big banks are increasingly vulnerable as they're not growing as quickly.

"A decade on from the global financial crisis, signs that the banking industry has entered the late phase of the economic cycle are clear: growth in volumes and top-line revenues is slowing, with loan growth of just 4% in 2018 - the lowest in the past five years and a good 150 basis points (bps) below nominal GDP growth," McKinsey said, adding that investor confidence in banks is also waning.

It also highlighted banks' depressed returns on equity, which haven't risen in line with their costs.

"The global industry approaches the end of the cycle in less than ideal health, with nearly 60% of banks printing returns below the cost of equity. A prolonged economic slowdown with low or even negative interest rates could wreak further havoc."

And though concerns about the global expansion running out of steam have been around for years, McKinsey insists the issue is now urgent.

"While the jury is still out on whether the current market uncertainty will result in an imminent recession or a prolonged period of slow growth, the fact is that growth has slowed," it said.

"This is likely the last pit stop in this cycle for banks to rapidly reinvent business models and scale up" via acquisitions, the consultancy added, urging banks to make "bold late-cycle moves" to avoid collapsing when the next recession comes.

For banks to become more resilient, for instance, McKinsey suggested banks should expand their offerings, pointing to Amazon and Chinese insurance firm Ping An.

"In China, Ping An has built an ecosystem that includes healthcare, automotive, entertainment, and tourism services, while in the US, Amazon offers businesses the traditional banking suite (that is, current accounts, credit cards, unsecured loans), while connecting them to the Amazon ecosystem, which includes non-financial products and services," the consultancy said, continuing that more and more clients are trusting big technology companies such as Amazon and Google to handle their financial needs.

At the same time banks spend only 35% of their budget on innovation compared to 70% by fintechs.

Lenders should also explore new ways to address customers' needs, especially if they save money, McKinsey said. "Both mergers and acquisitions (M&A) as well as partnerships" can help them to stay afloat too, especially if they strike deals with fintechs that improve their technology as well as scale.

"To survive a downturn, merging with similar banks may be the only option if a full reinvention is not feasible," it also suggested.

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