For global banking, the roller-coaster ride of the past 10 years is at last coming to a halt. A new reality is taking hold. Return on equity (ROE) is stable at 9.5 percent (the third consecutive year in which returns were in line with the longterm [1980-2015] average), and profits are rising. Banks have begun to lower operating costs, and their risk costs have also fallen. But this pause in the action may be short-lived. There are few loan-loss provisions left to release, and margins continue to fall across the globe. Cost-cutting is about the only cylinder still firing in the profit engine. Meanwhile, banks are under attack from new technology companies and others seeking to poach their customers. To date, banks’ losses to attackers have been little more than a Executive Summary 3 rounding error. But as digitization accelerates, banks will be in a battle for the customer that will define the next 10 years for the industry.
In this, the fifth edition of McKinsey’s Global Banking Annual Review, new research has generated a number of key findings:
■ The fight to hold on to customer relationships will be a high-stakes struggle. We estimate that in five major retail banking businesses (consumer finance, mortgages, SME lending, retail payments and wealth management) from 10 to 40 percent of revenues (depending on the business) will be at risk by 2025, and between 20 and 60 percent of profits, with consumer finance the most vulnerable. Attackers will likely capture only a small portion of these businesses; most of banks’ losses will come from margin compression as attackers force prices lower. Corporate and investment banking will be much less affected.
■ Banking enters the fight from a position of strength. Worldwide, profits reached a record $1 trillion in 2014. The top 500 banks earned $613 billion, while smaller banks and other institutions claimed the rest. But these vast and highly dispersed profits are a magnet for attackers and their investors.
■ China’s banking profits have grown an astonishing 500 percent since 2006. Over the past few years, almost all global banking revenue growth came from China. To be sure, banking in China is not like elsewhere; stateowned banks dominate the sector, and transparency is lacking. Moreover, with asset markets falling and volatility reentering the system, growth may stall. But the rise of Chinese banking is one of the great stories of the past 10 years.
■ Global ROE was stable at 9.5 percent in 2014, essentially unchanged from 2013. But margins are in steady decline, falling by 185 basis points in 2014, as interest rates remain low, competition intensifies and attackers start to undermine banks’ economics.
■ Many in the industry expect a rise in interest rates to provide structural support to profits. If rates rise the anticipated amount (which differs by The Fight for the Customer: McKinsey Global Banking Annual Review 2015 The fight to hold on to customer relationships will be a high-stakes struggle. We estimate that in five major retail banking businesses (consumer finance, mortgages, SME lending, retail payments and wealth management) from 10 to 40 percent of revenues (depending on the business) will be at risk by 2025, and between 20 and 60 percent of profits, with consumer finance the most vulnerable. 4 market), Eurozone banks could add 2.3 percentage points, at most, to ROE, and U.S. banks 2 points. In neither case, however, will the improved ROE comfortably exceed cost of equity (COE), and banks are at risk of competing away most of the potential windfall.
This report details these findings and their implications for banks. The industry has a fight on its hands. To win, banks will have to beat newcomers at their own game, delivering intuitive and emotionally rich customer experiences, while also adding the digital skills needed to become nimble low-cost competitors. Banks need to capitalize fully on their biggest advantages, data and access to the customer, while also rebuilding trust. Banks that embrace the digital revolution can find success, holding off attackers with one hand and less nimble incumbents with the other.