By 2019, top-decile performers were delivering about five times more value to their shareholders than the bottom decile (and 3 times more than the average bank). Since 2008, the gap between the banking industry’s leaders and followers, as measured by total returns to shareholders, has steadily widened.
From convergent resilience to divergent growth But that’s still far from being attractive to investors, who have many rapidly growing, more profitable opportunities to consider. If stars align, ROE in its upper range would compare favorably with the levels achieved in 2017–19. These variables will determine whether the industry will operate in the upper (12 percent) or lower (7 percent) range of profitability. This baseline is nuanced by region and will be shaped by three macro and interconnected factors beyond banks’ control: inflation and ultimately interest rates, government support for the recovery, and liquidity. Taking into account the likely macroeconomic and pandemic scenarios and factoring in the highly varied starting position of banks worldwide, we see the global industry set for a recovery that could put ROE at between 7 and 12 percent by 2025-which is somewhat aligned with what happened in the last decade (2010–20), when the average ROE was 7 to 8 percent. Baseline for 2022–25: Decent but not attractive This is reflected in the market multiples, where banking is currently valued more in line with an average utility, with a price-to-earnings ratio (P/E) of 15 times, than with a specialized financial services provider, where P/Es are 20 to 30 times. Please email us at: valuations suggest that capital markets are discounting an industry whose baseline for profitability and growth is decent and resilient but not attractive-and that is undergoing disruption from financial-services specialists with limited reliance on the balance sheet. If you would like information about this content we will be happy to work with you. We strive to provide individuals with disabilities equal access to our website. A few universal banks also gained, but the vast majority either realized small gains in their share price or lost value. Most of these deploy a specialized and capital-light business model or operate in fast-growing markets. Out of 599 financial institutions we analyzed, just 65 accrued all the gains (Exhibit 1). And these undervaluations persist even after a period in which the financial system as a whole gained about $1.9 trillion (more than 20 percent) in market cap from February 2020 to October 2021. Banks are trading at about 1.0 times book value, versus 3.0 times for all other industries and 1.3 times for financial institutions excluding banks, with 47 percent of banks trading for less than the equity on their books. The challenges facing a capital-intensive industry in a low-price environment also show up in valuations. In fact, the almost $2.8 trillion of capital that was injected by shareholders and governments into banking over the past 13 years eroded three to four percentage points of ROE. In an industry that has high capital requirements and is operating amid low interest rates, creating value for shareholders is structurally challenging. Cause for concern is evident in banks’ performance on two yardsticks: ROE, a measure of current profitability, and market-to-book value, a leading indicator of how capital markets value banking.įifty-one percent of banks operate with an ROE below cost of equity (COE), and 17 percent are below COE by more than four percentage points. But can we say a bright and smooth future lies ahead for banks and their shareholders? Not really. The banking system is at least as solid as it was before the pandemic-and much healthier than after the last crisis.
Digital banking accelerated, cash use fell, savings expanded, remote became a way of working, and environment and sustainability are now top of mind for customers and regulators.
#One last stop review pdf
( A PDF of the full 2021 McKinsey Global Banking Annual Review, with more detailed data, and a set of strategic questions for banks, is available for download on this page.)īut if the pandemic has not had the expected harmful financial effects on the global banking industry, it has certainly had plenty of others. ROE in 2020 was 6.7 percent-less than the cost of equity but still a better showing than expected and above the 4.9 percent observed in 2008 in the aftermath of the financial crisis. In fact, bank profitability held up better than most analysts expected. Unlike the previous economic crisis, this time banks did not witness any abnormal losses, material capital calls, or “white knight” acquisitions.
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