McKinsey: 60% Of Banks May Not Survive An Economic Slowdown

A third of banks around the world are too weak to survive a severe economic recession, a management consulting firm McKinsey & Co. said in a Monday report.

What Happened

Pointing at decelerating growth in volumes and revenues, with lending growth standing at 4% in 2018, McKinsey said the banking industry is in the late phase of an economic cycle.

The 4% lending growth in 2018 was the lowest in five years and is also 150 basis points below nominal GDP growth, the consulting firm said. 

While experienced professionals in the banking industry may have seen this cycle repeat itself a few times, this particular cycle seems different, the report said.

Despite a small rise in interest rates, the global return on tangible equity (ROTE) has stayed at 10.5%.

Why It Matters

The stagnation appears to be coming from emerging markets, where banks have seen their ROTE decline sharply, from 20% in 2013 to 14.1% in 2018, which McKinsey attributed to ongoing digital disruption.

In developed markets, strong productivity and risk cost gains have helped banks improve their ROTE from 6.8% to 8.9%, the report said. 

Globally, the return on tangible equity is lower than the cost of equity at about 60% of banks, McKinsey said.

An extended economic slowdown that features low or negative interest rates “could wreak further havoc,” according to McKinsey. 

What's Next

To improve the situation, McKinsey called for banks to “urgently consider a suite of radical organic or inorganic moves before we hit a downturn.”

Struggling banks can make defensive moves, offensive moves and tactical improvements to their businesses to improve the chances of weathering a slowdown, the consulting firm said. 

A defensive move could involve the improvement of risk management with advanced analytics and artificial intelligence, the report said. 

Going on the offensive may mean “dramatically lowering costs by outsourcing non-differentiated cost drivers to industry utilities.”

When it comes to tactical improvements, banks should consider advancing customer experience, supported by advanced data analytics, to find revenue opportunities they may have been missing, McKinsey said.