The vast majority of banks worldwide should survive in almost all COVID-19 scenarios as the global banking system entered the crisis well-capitalized and is far more resilient than it was 12 years ago, indicates McKinsey & Company Global Banking Annual Review 2020, released today.
Global Banking Annual Review is our consultancy’s flagship banking publication. The 2020 report is the tenth edition of the Banking Review and is based on insights and expertise from McKinsey’s Global Banking Practice.
Further, we expect that most institutions can regain their 2019 ROE within five years, provided they are willing to do the hard work necessary on productivity and capital management. The farsighted among them will do even better.
The crisis of 2008 came from within the financial services industry. Today, in this crisis of the real economy, banks are economically afflicted alongside other sectors in society. But
banks are also playing an important role in helping society through the crisis: as the conduit for state support, supporting small businesses, companies, and individual citizens.
The crisis is delivering, in effect, the biggest stress test to banks, a test which the industry is withstanding to-date, whilst demonstrating resilience and purpose. The impact of the last year without the role the industry has played is likely much deeper.
Going forward, McKinsey anticipates the test presented for banks by the pandemic will evolve in two stages in the months and years ahead. First will come severe credit losses, likely through late 2021; almost all banks and banking systems are expected to survive. Then, amid a muted global recovery, banks will face a profound challenge to ongoing operations that may persist beyond 2024. In a muted economy, global ROEs are not expected to return to the pre-crisis level for at least five years
- Depending on the scenario, from $1.5 trillion to $4.7 trillion in cumulative revenue could be lost between 2020 and 2024. In McKinsey’s base-case scenario, $3.7 trillion of revenue will be foregone—the equivalent of more than a half year of industry revenues that will never come back.
- In most scenarios, banks in North America would see a faster decline in ROE and a more robust recovery than banks in Europe.
A key lesson from the 2008 crisis is that banks must move quickly. The report lays out a sensitivity analysis of the three levers banks can pull: increasing revenues, managing costs, and better managing their equity capital. Getting back to pre-crisis ROE will require significant but attainable effort.
The level of emphasis on each of these levers will vary by region. Near-term recovery will require even more work in regions such as Europe, which already had fundamental challenges to profitability, depressed margins, and ROEs far below the cost of equity.
Alexandru Filip, Bucharest-based McKinsey partner, and location manager for Romania
‘’Our 2020 Global Banking Report anticipates that in months and years to come, the pandemic will present a two-stage problem for banks (meaning the certain impact on risk initially, moving then to challenges on operations and pressure on revenues). The COVID-19 crisis has found Romanians in a fragile financial position and many companies were forced to reinvent themselves in ways none expected a few months ago. In this context, local banks can have a prominent role in guiding their clients, both retail and corporate, towards economic recovery, while reinventing themselves and further pushing the digitization agenda. We should also remember that financial penetration in Romania lags behind CEE peers, pointing to further growth opportunities for banks equipped to capture them, being via products adjusted to changing customer needs and behaviors, proper advisory or enhanced digital capabilities, to name a few growth enablers.’’
For the long term, banks need to reset their agenda in ways that few expected nine months ago. McKinsey sets out three imperatives that will position banks well against the trends now taking shape.
- They should embed newfound speed and agility, identifying what worked well in their response to the crisis and finding ways to preserve those practices. Banks can pursue four actions: institutionalize the new decision-making patterns, focus on the customer, embed the new rules of thumb for data, reimagine work for agile, remote teams
- Another essential aspect is that banks to reinvent their business model to sustain a long winter of zero percent interest rates and economic challenges or lower demand, while also adopting the best new ideas from digital challengers.
- And they must bring their broader purpose to the fore, especially environmental, social, and governance issues, and collaborate with the communities they serve to recast their contract with society. The moment is right for banks to affirm their dual role as sources of stability against the pandemic’s upheaval and as beacons to the societies and communities, they serve in a post-COVID-19 world.