The valuation gap between the main banking institutions and those that follow is widening, a new report by management consulting firm McKinsey said.
According to the 11th McKinsey Global Banking Review, banks are divided into “rock star” and “utility type” laggards, based on their total return to shareholders, which revealed a wide divergence in industry performance, time passing to adapt the economic models and catch up.
“The outlook for the industry remains murky, with half of the banks failing to cover the cost of their equity,” McKinsey said in the report.
“Unlike the previous economic crisis, this time around the banks have not experienced abnormal losses, calls for physical capital or acquisitions of white knights. In fact, bank profitability has held up better than most analysts expected. The ROE in 2020 was 6.7%, higher than the 4.9% observed in 2008 in the aftermath of the financial crisis. “
Banks around the world faced a more difficult operating environment amid headwinds triggered by a pandemic that sent the global economy into its worst recession since the 1930s. Historically low interest rates have also made it difficult to increase profits. However, the global economy has rebounded this year, easing the pressure on lenders’ profitability.
The global industry is poised for a recovery that could take ROE to between 7% and 12% by 2025, according to the report.
This baseline scenario is nuanced by region and will be shaped by three macroeconomic factors beyond the control of banks: inflation and interest rates, government support for the recovery and liquidity. These variables will determine whether the industry will operate in the upper (12%) or lower (7%) profitability range, McKinsey said.
The challenges facing a capital-intensive industry in a low-price environment are reflected in valuations, according to the report.
“Banks trade at around 1.3 times book value, compared to 3 times for all other industries and 1.3 times for financial institutions excluding banks, with 47% of banks trading for less than equity from their books, ”McKinsey said.
Payments specialists, exchanges and some securities companies have captured more than 50 percent of the $ 1.9 trillion in market capitalization that the industry has added. Only 65 of 599 institutions analyzed achieved all the gains, McKinsey found.
“FinTechs and specialist financial service providers – in payments, consumer credit or wealth management – generate higher valuation multiples than most global universal banks. Some FinTechs go from a sketch to a billion dollar valuation within a few years, ”the company said.
There are four main sources of discrepancy in performance, according to the report. The first three – geography, scale and industry focus – are difficult for banks to change. The fourth – the business model – is well able to adapt, the consulting firm recommended.
Decisions made over the next 18 to 24 months will determine which companies emerge on the right side of this divergence, he said.
Two-thirds of the value generated by the banking industry is created in the first two years after a crisis, analysis of historical data from McKinsey has shown.
“The value will be captured by institutions that radically change their business models in response to current market pressures: squeezing margins, digital customer expectations and the rapid growth and success of non-traditional banking players. Not only is there simply no value to be expected, but history shows that institutions that take bold steps towards growth in the first few years after a crisis generally retain those gains over the longer term, ”the report says. report.
Three elements to creating a future-proof business model include customer ownership with integrated digital financial services, an effective business model that drives growth beyond the balance sheet, and continuous innovation and rapid time-to-market. , leveraging technology and talent, according to the McKinsey report. suggested.
Updated: December 3, 2021, 11:02