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  • The Current Status and Future of Banking – Global Banking Annual Report 2017

    CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited

    Albania, Tirana| 14 November 2017

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    Agenda

    2 McKinsey & Company

    State of the industry

    Digital and AA at scale

    Eco-systems?

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    The global banking industry shows many signs of renewed health…

    Innovation on the rise: Banks are investing in customers and striking several Fintech partnerships, many of which are bearing fruit

    Deep capital reserves: Banking industry’s Tier-1 capital ratio reached a decade-high 12.4 percent in 2016

    High liquidity: Loan-to-deposit ratio fell to 93 percent in 2016, the lowest level in decades, as compared to 120 percent in 2007

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    …banks have taken an ax to costs

    15

    45

    0 14 12

    57

    42

    11 13 2016 2010

    54

    66 63

    58 55

    64 61

    46

    58

    64

    45

    58

    65

    40

    56

    45 44

    64

    43

    63

    54 57

    65

    42

    1.5

    1.61.6 1.71.7

    1.5 1.51.51.5

    1.61.6 1.5

    1.6 1.71.7

    1.8 1.9

    2.1

    1.50

    2.10

    1.80

    1.65

    1.95

    1.35

    1.5 1.6

    1.6

    Total Emerging Global Total Developed

    Cost-to-income ratio1, Percent

    Cost-to-assets ratio, Percent

    SOURCE: McKinsey Panorama, SNL - Based on a sample of ~1.000 largest banks in terms of assets

    1 Note: cost-to-income ratio of developed market banks increased in the last two years, however this is due to a margin erosion which could not be offset by the advance in cost efficiency

    IN PROGRESS

    2010 2016 2014 Developed world

    Emerging markets 40.7 31.5 37.2 China

    58.4 53.6 53.8 Latin America

    43.9 43.8 44.9 Other Emerging

    47.9 48.1 47.7 Emerging Asia

    51.0 54.1 51.9 Other Developed

    62.3 60.9 65.3 North America

    61.1 67.8 64.7 Western Europe

    67.2 57.4 56.8 Japan

    56.9 75.0 69.5 United Kingdom

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    “Great Hype” Crisis New normal “Great Hype” Crisis New normal

    ROE, 2002-2016 Percent

    Price-to-book multiples1, 2002-2016

    Yet profits remain elusive, leading to depressed valuations

    8.6 9.69.69.3

    8.28.0

    9.2

    6.5

    4.9

    15.2

    17.4

    14.9

    12.0

    9.4

    15.5

    08 10 06 12 04 2002 2016 14

    Developed world Emerging markets

    SOURCE: Bloomberg, Compustat, Datastream, OECD, SNL, Thomson Reuters, McKinsey Panorama – Global Banking Pools

    NOTE: Book value does not exclude goodwill as the data is available only for ~60% of covered banks 1 Based on a sample of listed banks with >$2 billion in assets

    1.2 1.01.0

    1.3 1.1

    1.4

    1.9

    2.1

    1.4

    3.2

    2.12.1

    1.8

    1.2 1.3

    2.4

    1.00.90.9 1.0

    0.9 0.7

    1.01.0

    0.7

    1.6

    2.0

    2.0 1.9

    1.9

    1.1

    08

    1.7

    04 2002 06 12 2017 Aug

    14 16 10

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    6 McKinsey & Company SOURCE: SNL, McKinsey Panorama – Global Banking Pools

    Impact of different levers on global1 RoE, 2014-2016 Percent

    EEMEA

    Western Europe

    -1.3

    -3.7

    2.4

    2.0

    -0.4

    2.1

    -0.5

    0.1

    -0.4

    -0.6

    -0.3

    -0.2

    4.2

    12.6

    3.7

    12.3

    Global

    1.5

    0.6

    1.6

    0.6

    8.6

    Capital Risk cost ROE 2016 Taxes

    0

    Margin Fines and others

    9.6

    ROE 2014

    0.1

    Cost efficiency

    1 Based on a sample of ~1,000 largest banks in terms of assets.

    Declining margins have offset benefits of significant cost reduction on a global basis; the regional stories are different

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    The picture varies by business line

    SOURCE: McKinsey Panorama – Global Banking Pools

    2016

    0.30 (8%)

    2010

    +4% p.a.

    0.33 (10%)

    1.49 (48%)

    0.24 (6%)

    1.53 (39%)

    1.88 (47%)

    3.13

    0.26 (8%)

    1.05 (34%)

    3.95

    Asset Management Corporate banking

    CMIB Retail banking

    ESTIMATES

    USD Trillion, Percent Global revenue after risk cost Return on equity breakdown 2016

    Percent

    ~15-18%

    8-12% Cost of Equity

    Corporate banking

    Retail banking

    CMIB

    AM

    ~10-12%

    ~9-10%

    ~6-8%

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    The digital threat continues to accelerate

    What we had said in 2015 What happened in last 2 years

    Fintechs have been expanding into segments beyond retail and offering more sophisticated solutions (i.e. half of the 1000+ fintechs in our database have offerings covering beyond retail)

    Margin erosion continues and there are early sign of volume loss in selected markets (e.g., in China digital attackers’ share in unsecured consumer lending has ballooned from 1% to 25% in 3 years)

    Most banks have started the digitization journey, but only few have conscientiously chosen a new strategic path

    Customer disintermediation Non-bank attackers attack origination and sales (i.e. ~22% ROE vs 6% for “balance sheet provision”), which account for ~60% of global banking profits

    Margin erosion Five retail businesses have substantial value at risk due to price erosion brought by Fintech and digital attackers (~20-60% profit, and up to 6% ROE is at risk)

    Incumbents’ strategic thrusts Fully digitized universal bank, Focused player, Ecosystem owner, or White-label balance sheet provider

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    Looking ahead – Digital as a threat

    ▪ Traditional banking industry’s barrier is vanishing

    ▪ Banks are likely to suffer in the near term

    ▪ Rules of engagement for businesses becoming more customer focused

    ▪ Customer journeys are being reshaped completely

    Implications “Four horsemen of the e- pocalypse”

    Impact on Financials

    ▪ Global banking ROE will continue the downturn albeit at varying pace

    ▪ Revenue margin contraction will continue, offsetting most benefits from other drivers

    ▪ Growth rate will be challenged in most regions Invisibility

    ▪ Access financial services without knowing the brand

    Commoditization ▪ Through greater transparency

    Unbundling ▪ Deposits and payments unbundled as

    consumers leverage third-party payment solutions

    Disintermediation ▪ Borrow money online without

    reaching out to banks

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    Agenda

    10 McKinsey & Company

    State of the industry

    Digital and AA at scale

    Eco-systems?

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    11 McKinsey & Company SOURCE: Annual reports; press searches; McKinsey

    ~ 2

    -67%

    Digital attacker1 Direct banks2

    3-5

    Traditional3

    5-7

    5

    110

    300

    Direct banks6

    -98%

    Digital attacker4 Traditional3

    Operating Expense % of outstanding loan balance

    Customer acquisition cost (rough estimates) USD per customer

    1 Lending Club First Quarter 2016 Results 2 Direct banks – ING DiBa, Activo, Checbaca, AirBank, mBank, Zuno (2014) 3 Traditional Banks – Based on sample of top 500 banks’ data from Reuters 4 On Deck, company presentation May 2015 5 Foundation Capital, 2014; Lending Club based on St. Louis Fed, Federal Reserve 6 Based on expert interviews

    Radical cost take out via Industrialization will be a ticket to play in the future

    Cost comparisons traditional, direct and digital attacker banks

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    We are already seeing banks drastically cut costs to reach profitability targets

    SOURCE: Bank annual reports

    Cost reduction $ billion2

    FTE

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