The influential management consultancy on December 7 published its sixth annual report on the global retail and wholesale banking industry entitled A Brave New World For Global Banking.
In it, McKinsey said the time for “tinkering around the edges” of business models had passed and will “only exacerbate the sense of fatigue that comes from years of one-off restructurings”.
Many of the world’s biggest banks have initiated cost-cutting drives in the years since the financial crisis in a bid to become leaner machines in an environment of lower revenues and higher regulatory capital requirements. The likes of Barclays, Royal Bank of Scotland, Deutsche Bank, UBS and Credit Suisse have been among the most severe with their restructurings.
But worryingly for banks in the UK and Europe, McKinsey said it was they who faced the greatest threat under its consensus scenario of a slow recovery in economic growth, a slight rise in interest rates and an “evolutionary digitisation of the industry”.
McKinsey wrote: “In the current consensus scenario featuring rate increases, an incumbent-driven digital transformation and some revenue stabilisation, profits in the UK and continental Europe will drop from $ 110 billion today to $ 77 billion in 2020; while ROEs, about 4% on the continent and 3% in the UK, would fall to 3% and 2%, respectively.
“However, if rates stay as unfavourable as today or digital attackers disrupt the industry more significantly, another $ 60 billion may be at risk.”
In the face of this “uncomfortable new reality” the European banking sector may require consolidation if the firms in it are to return to health.
Globally, banks have “nowhere to hide” from the challenges of stagnating growth, post-crisis regulatory reforms and competitive pressures from emerging fintech firms, McKinsey said.
It flagged up what its analysts call the “triple-R agenda” that bank bosses should adopt to help ease the pressure: Resilience – ensuring the short-term viability of their business through cost cutting and balance sheet improvements; Reorientation – a more offensive strategy involving new operating models; and renewal – the need for new technology and data sets as well as a new “shared vision and value” across the organisation.
The report echoes a November study from EY on the investment banking industry, which said bank chiefs would need to be more innovative in overhauling their businesses. EY said: “The challenge to investment banking leaders is to be bold and move beyond incremental adjustments to broader transformation.”