Global banking revenue hits 14-year high of $345bn in 2022, says McKinsey
Global banking revenue reached $345bn marking a 14-year high for the global industry, says a recent report by McKinsey & Company.
Per the 2022 Global Banking Annual Review report, profitability of banks was propelled by a sharp increase in net
margins, as interest rates rose after languishing for years.
“Traditional banking institutions account for half of this valuation, while specialists and fintechs represent the other half—up from a 30 percent share five years ago. About one-half of the valuation gap with other sectors is driven by the low profitability of the banking industry. The other half comes from the lack of future growth, demonstrated by the low price-to-earnings of about 13, compared with an average in other sectors of 20,” stated the report.
Boost to profitability, the report however noted, may prove transitory as banks face long-term growth slowdown.
Despite the significant growth in revenue, total global market capitalisation of banks dropped from a peak of $16 trillion in 2021 to $14.5 trillion in May 2022.
Coupled with the decline in global market capitalisation is a weak return on equity.
“Despite these short-term improvements, return on equity remains weak, far below where it was before the 2008 financial crisis. While half the world’s banks in 2022 continue to have a return on equity that is above the cost of equity, our analysis suggests that the recent margin increases delivered returns above the cost of equity for just 35 percent of banks globally,” said the report.
“In the event of a long recession we estimate that banks’ return on equity globally could fall to 7 percent by 2026—and below 6 percent for European banks,” it added.
According to the report, banks on the back of the harsh operating environment experienced in 2022, now have the opportunity to take bold steps to build short-term resilience and lay the groundwork for long-term growth.
“Optimizing balance sheets and cost and capital positions will help banks through these volatile times, and it will be more important than ever to build exceptional risk management practices and technological infrastructure that can resist cyberattacks. In the longer term, banks from traditional business models in particular will need to transition to more future-proof platforms, in which different business units such as everyday banking and complex financing or advisory services will be decoupled, so that banks can foster highly differentiated customer relationships. They will also need to embrace new industry-shaping growth trends, such as environmental, social, and governance (ESG) investing, beyond-banking offerings, and advanced analytics,” the report further pointed out.
Banks record GHS 4.4bn profit-after-tax at end-October 2022
