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2019 Global Banking Review: Time for bold late-cycle moves

by The Financial Brand | Nov 21, 2019

According to the McKinsey Global Banking Annual Review 2019, as growth slows, banks and credit unions across the globe need to urgently consider radical moves before we hit a downturn.

With most of the world’s economies showing clear signs of being in the late phase of the economic cycle, many traditional financial institutions are facing a critical juncture. Whether a recession or a prolonged stagnant period is in the cards, banks and credit unions can anticipate pressure on earnings and increasing risk due to continued pressure on margins and decreasing loan demand.

Even under current conditions nearly three in five (60%) of financial institutions worldwide studied by McKinsey generate returns below their cost of equity. Further, more than a third (35%) are considered “challenged,” according to McKinsey’s analysis. Not by the usual reason of poor credit quality, but by their weak competitive situation shaped by geography, scale, differentiation and business model.

What makes this scenario different from past economic cycles is that the normal pressures of a downturn are being compounded by the increasing threat posed by nonbank competition, both from fintech firms and big technology companies.

These new entrants are powering off consumers’ willingness to conduct financial transactions digitally. Online banking has grown on average by 13 percentage points over the past five years worldwide, with online banking in North America approaching 80%, and showing no signs of stopping there.

Taken together, all this calls for urgent action, states McKinsey. For leading institutions action is required to protect and amplify returns. For the many underperformers; however, the need is more fundamental. They must gain scale and reshape traditional bank-operating models, the consulting firm maintains or slip into irrelevance.

Sources: The Financial Brand and McKinsey