Global banking Industry may lose $3.7 trillion revenue in Covid aftermath, says Mckinsey report

The global banking industry will witness $3.7 trillion revenue loss between 2020 and 2024 amid muted global recovery in the aftermath of Covid-19, says the McKinsey Global Banking Annual Review 2020.

The report says: “In our base-case scenario, $3.7 trillion of revenue will be forgone—the equivalent of more than a half year of industry revenues that will never come back.”

The report predicts in months and years to come, the pandemic will present a two-stage problem for banks. First will come severe credit losses, likely through late 2021; almost all banks and banking systems are expected to survive. Then, amid a muted global recovery, banks will face a profound challenge to ongoing operations that may persist beyond 2024. Depending on scenario, the global banking industry will lose from $1.5-4.7 trillion in cumulative revenue between 2020 and 2024.

The report says that return on equity (RoE) of banks would continue its decline, from 8.9 percent in 2019 to 5.4 percent in 2020 to 1.5 percent in 2021. At the trough in 2021, ROE would fall to −1.1 per cent in North America, −1.8 per cent in Europe, and −0.2 per cent in developed Asia. ROE would fall from higher starting levels and bottom out higher in emerging Asia (2.5 per cent), the Middle East and Africa (MEA; 3.7 per cent), and Latin America (5.2 per cent); and it would take a smaller dip to 8.6 per cent in China.

The McKinsey Global Banking Annual Review says that though the banks have not yet had to take substantial write-offs, thanks to their forbearance programs and significant government support, which have kept households and companies afloat, it says that this situation will not last long and provision for loan defaults in coming years will exceed those of the Great Recession.

As per the report, global banks have provisioned $1.15 trillion for loan losses through third quarter 2020, much more than they did through all of 2019 in anticipation of personal and corporate defaults.

On the positive side, the McKinsey Global Banking Annual Review says that banks responded extraordinarily well to the first phases of the crisis, keeping workers and customers safe and keeping the financial system operating well. Now, they need equal determination to deal with what comes next by preserving capital and rebuilding profits.

It says that banks would expedite their digital shift to wring more productivity from their operations. According to the report, many customers are already making and reconfiguring the branch network, where demand has softened.

“In the past year, the use of cash and checks—core transactions for branches—has eased; in most markets, about 20-40 per cent of consumers report using significantly less cash. In the meantime, customer interest in digital banking has jumped in many markets, although this trend varies widely. In the United Kingdom and the United States, only 10-15 per cent of consumers are more interested in digital banking than they were before the crisis (and 5-10 per cent are less interested). In Greece, Indonesia, Mexico, and Singapore, the “more interested” share ranges from 30-40 per cent,” says the report.

Meanwhile, the report says that the pressures of digitization, which boosts competition and compresses margins, are growing. Some emerging-market banks are managing well, offering innovative mobile services to customers. But the report finds that in the largest emerging markets — China and India — banks are losing ground to digital-commerce firms that have moved rapidly into banking.

In the developed economies, says the report, digitization is coercing conservative regulators are now gradually warming up to the entry of non-banks into financial services.

It predicts in times to come huge tech companies may be able to insert themselves between banks and their customers, capturing the vital customer relationship and presenting an existential threat to the banks.