Why the financial industry is facing difficult years

I.n the famous fantasy television series “Game of Thrones”, “Winter is coming” stands for a time full of disaster. McKinsey’s consultants expect a very long cold spell triggered by the Corona crisis in their current banking study for the financial sector. “The banks have to be prepared for a long winter,” is how Philipp Koch, managing partner of McKinsey, sums up the central statement of the study in an interview with F.A.Z. together. Although they are better positioned than in the great financial crisis of 2008 and 2009, they are still facing major challenges in terms of capital, risk management and productivity, says the banking expert.

In the study, which refers to banks all over the world, the consultants expect high loan defaults due to the repeated bankruptcies in the real economy. You run through three scenarios for the period 2020 to 2024. If the winter remains mild, the institutes face a loss of earnings of 1.5 trillion dollars. If the winter becomes hard, it is even $ 4.7 trillion less. In the middle scenario, revenues of 3.7 trillion dollars break away, as much as the banks typically generate in six months. In Europe, the loss of earnings is a good 770 billion dollars.

In addition, there are high loan defaults with the wave of insolvencies expected by many. This year banks around the world would have made loan loss provisions of $ 900 billion. Together with the provisions in the coming year, McKinsey consultants expect a provisioning requirement of 1.9 trillion dollars. She believes that an additional $ 800 billion could be added between 2022 and 2024.

Cost savings recommended

This has a significant negative impact on banks’ profitability. The return on equity, which averaged 8.9 percent in 2019, could therefore fall to 4.9 percent this year and 1.5 percent in the coming year. In the medium as well as the bad economic scenario, the return on equity of both North American and European institutions would slide into negative territory.

As befits a consulting firm, McKinsey recommends that banks take measures to increase productivity and, of course, to cut costs. In their opinion, productivity can be increased by up to 30 percent. The estimates of the loss of earnings do not take these efficiency improvements into account, so that the banks could still take countermeasures. Koch still sees opportunities for savings in the banks. Digitization enables branches to be dismantled and staff to be retrained for new business areas. There is still potential for optimization in the outsourcing of certain functions to external service providers, for example in terms of the quantities requested and prices. He believes that overcapacities can be reduced in the central departments, which, for example, had to be set up because of the stricter regulatory requirements, such as legal departments. Finally, the trend towards home offices also enables a review of real estate contingents, i.e. how much office space is still needed.

The banks can also take countermeasures on the income side. “The customer potential of digitization is far from exhausted,” says Koch with conviction. The high levels of customer deposits could be translated into higher-fee products. After all, certain services could be priced differently. Bank account fees have already risen significantly this year. According to the Federal Statistical Office, consumers had to pay 6.4 percent more for this in October than twelve months earlier. Between 2015 and 2019, account fees increased by 25 percent.


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