A new survey from consultancy McKinsey & Co has found that a majority of banks globally may not be economically viable because their returns on equity aren’t keeping pace with costs.
The study looked at 1,000 banks in developed and emerging countries and found that just over a third had made a return on capital of just 1.6 percent over the past three years. This compares to returns of just over 17 percent for top banks over the same period.
“Nearly 35 percent of banks globally are both sub-scale and suffer from operating in unfavorable markets”, as well as having flawed business models, said McKinsey.
It added that “to survive a downturn, merging with similar banks may be the only option, if a full reinvention is not feasible.”
According to the report, banks are not as well-prepared for a downturn as they were when the global financial crisis erupted in 2007 in terms of profitability.
“While the jury is still out on whether the current market uncertainty will result in an imminent recession or a prolonged period of slow growth, the fact is that growth has slowed,” McKinsey said.
“This is likely the last pit stop in this cycle for banks to rapidly reinvent business models and scale up via acquisitions,” the consulting firm said, adding: “The time for bold and critical moves is now.”
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