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BANKING

McKinsey says one third of banks on the brink in a downturn

Consultant says 60% of banks produce returns below their cost of capital, and a third of them are so flawed they may not survive a downturn.

Banks are in an end-of-cycle slowdown from which a third of them may not emerge unless they revamp their models for a digital world – and emerging markets aren’t immune.

This is the sobering conclusion of a new report from McKinsey & Co today, October 22. 

“Nearly 35% of banks globally are both sub-scale and suffer from operating in unfavourable markets,” the report says. “Their business models are flawed, and the sense of urgency is acute. To survive a downturn, merging with similar banks may be the only option if a full reinvention is not feasible.”

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Joydeep Sengupta, McKinsey

The report finds that nearly 60% of banks are making returns below their cost of equity – a perilous position if a prolonged economic slowdown takes hold. Globally, loan growth stood at just 4% in 2017/18, the lowest level in the last five years, and 150 basis points below nominal GDP growth.

“While banks have worked hard at reinventing themselves, at this point the outlook is less optimistic than in the past,” Joydeep Sengupta, senior partner at McKinsey in Singapore and co-author of the report, tells Euromoney.