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Challenging times ahead for global banks, says McKinsey

By The IJ Staff | December 14 2020 09:30AM

Global banks face challenging times ahead as zero per cent interest rates are expected to hold steady over the next few years. And if they want to survive and thrive, banks will have to reinvent their business models and play a crucial role in their communities to survive, according to McKinsey’s Global Banking Annual Review.

The review predicts severe credit losses will be felt by global banks likely through late next year. While all the banking systems are expected to survive, they will then have to face the challenge of ongoing losing operations that may persist beyond 2024.

Trillions of dollars could be lost

“Depending on the scenario, from $1.5 trillion to $4.7 trillion in cumulative revenue could be foregone between 2020 and 2024. In our base-case scenario, $3.7 trillion of revenue will be lost—the equivalent of more than a half year of industry revenues that will never come back,” states the report.

People and businesses that have been thrown out of work will sharply increase personal and corporate defaults. In anticipation, global banks have provisioned $1.15 trillion for loan losses through third quarter 2020, much more than they did through all of 2019.

The good news for banks and the financial systems is that the industry is sufficiently capitalized to withstand the coming shock.

Second phase will see shift in priorities

But in a second phase, the impact will shift from balance sheets to income statements. In some respects, the pandemic will only amplify and prolong pre-existing trends, such as low interest rates.

“On balance, however, the outlook is challenging. In the base-case scenario, we expect that globally, revenues could fall by about 14 per cent from their pre-crisis trajectory by 2024. On an absolute basis, compared with pre-crisis growth projections, the COVID-19 crisis may cost the industry $3.7 trillion.”

Some banks will need to rebuild capital to fortify themselves for the next crisis in a far-more challenging environment than the last decade.

The report suggests banks speed up the shift to digital banking that many customers are already making and reconfigure the branch network, where demand has softened. Lower demand will create an opportunity to redesign the bank’s footprint, retraining some branch bankers and others in the bank to become contact-centre agents.

May need to change business model

Banks must also embed any newfound expertise, finding ways to preserve the best parts of their response to the crisis. But they must also reinvent their business models to sustain a long winter of zero per cent interest rates and economic challenges. Add to that environmental, social and governance issues, and they need to collaborate with the communities they serve to recast their role.

“Banks, like other sectors of the economy, may face a cold winter ahead, but there is the promise of a thaw,” says the report. “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. They must act because they have a crucial role to play in the work to restore and sustain livelihoods in their communities.”

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