Industry Overview - The global banking industry generated 1.1 trillion in net income in 2023, with a return on tangible equity (ROTE) of 11.7% [7] - The industry intermediated 1.15 trillion [10] - Despite strong performance, the industry faces skepticism with a price-to-book ratio of 0.9, the lowest among all sectors [12] Performance Drivers - Recent performance improvements are largely attributed to rising interest rates, with net interest margins (NIMs) increasing significantly [6][16] - Labor productivity growth in banking has been mixed, despite high tech spending, with US banks showing declining productivity [27][29] - Regulatory changes continue to require significant investment, adding to operational costs [6] - Competition from non-traditional players, such as private credit and fintech, is intensifying in profitable segments like payments and wealth management [6] Structural Challenges - The industry's profitability is uneven across geographies, with countries like the US, UK, and India showing improved performance, while others like Brazil and China face lower ROTEs [18] - Scale economies remain elusive in many markets, with tech spending not translating into proportional productivity gains [27][29] - The cost of funds is expected to rise due to quantitative tightening and increased competition for deposits [32] Winning Strategies - Top-performing banks focus on a combination of structural advantages (segment selection, scale, and geographic positioning) and operational execution (analytics, marketing, and tech) [6][36] - 14% of banks have achieved a price-to-book ratio above 1 and a price-to-earnings ratio above 13, indicating strong value creation [37][38] - Winners often operate in attractive markets with high margins and strong fundamentals, such as Australia, Canada, and India [41][42] - Execution excellence, including granular pricing, risk selection, and customer-centric strategies, drives outperformance [52][53] Future Outlook - If interest rates decline, NIMs could compress by 50-60 basis points, potentially reducing ROTE to near cost of capital levels [17] - Banks will need to reduce costs by 5% annually to maintain current ROTE levels, a significant challenge given historical cost reduction rates of 1% [31] - AI and advanced analytics offer potential for productivity gains, but widespread adoption and impact remain in early stages [27][57] Management as a Differentiator - 10% of banks have improved their ROTE by five or more deciles over the past decade, demonstrating the potential for breakout performance [58][59] - Management teams must focus on structural and executional leverage, including scale, portfolio mix, and operational efficiency, to drive value creation [62] - Successful banks often adopt a "management quotient" that emphasizes agility, talent optimization, and strategic focus to outperform peers [58][62]
Global Banking Annual Review 2024: Attaining escape velocity
麦肯锡·2024-10-18 00:08