Management consulting firm McKinsey & Company has published a global banking review and found that a majority of banks worldwide may not be economically viable. More than half of them still do not generate their cost of equity 10 years after the crisis and may not survive an economic downturn.
Majority of Banks ‘Destroy Value’
McKinsey & Company published its Global Banking Annual Review 2019 this week. The 58-page report highlights concerns over the health of the global banking sector. The firm groups banks worldwide into four broad categories, noting that “Every bank is uniquely bound by both the strength of its franchise and the constraints of its markets or business model.”
The first category is “market leaders” which are the top 20% of banks globally that capture almost 100% of the economic value added to the entire industry. The next is “resilients” which are nearly 25% of banks that have maintained leadership in challenging markets such as Europe.
The other two categories consist of troubled banks. About 20% of them are classified as “followers” which are those that have not achieved scale and are weaker than their peers, the report describes. “They are at risk from a downturn and must act promptly to build scale in their current businesses, shift business models to differentiate, and radically cut costs.”
The last category, “challenged banks,” comprises about 35% of banks globally that are both sub-scale and suffering from operating in unfavorable markets, McKinsey explained, asserting:
Their business models are flawed, and the sense of urgency is acute. To survive a downturn, merging with similar banks or selling to a stronger buyer with a complementary footprint may be the only options if reinvention is not feasible.