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Moving banking to solid grounding and higher level of security
Corporate November 07, 2018 01:00
By THE NATION
BANKS IN the changing world of financial intermediation is based on data and insights from Panorama, according to McKinsey’s eighth annual review of the global banking industry “New rules for an old game” by McKinsey’s proprietary banking research arm.
Key findings from the 2018 report include that since the crisis, the global banking industry and financial regulators have worked in tandem to move the financial system to a solid grounding with a higher level of safety. Global Tier 1 capital ratio—one measure of banking system safety—increased from 9.8 per cent in 2007 to 13.2 per cent in 2017. Other measures of risk have improved as well; for example, the ratio of tangible equity to tangible assets has increased from 4.6 per cent in 2010 to 6.2 per cent in 2017.
However, growth for the banking industry continues to be muted—industry revenues grew at 2 per cent per year over the last five years, significantly below banking’s historical annual growth of 5 to 6 per cent.
Furthermore, global banking return on equity (ROE) has hovered in a narrow range between 8 and 9 per cent since 2012. We find significant geographical variance. Banks in both the UK and Western Europe increased their ROEs significantly whereas their counterparts in the US and Japan registered declines
Emerging markets are beginning to falter. In 2017, the price-to-book ratio of developed-market banks overtook that of emerging market banks for the first time in 14 years
However, the banking sector’s price-to-book ratio was consistently lower than that of every other major sector over the 2012-17 period—trailing even relatively sluggish industries such as utilities, energy, and materials. This difference persists even when other valuation multiples, such as price-to-earnings ratios, are compared.
At the heart of this report is McKinsey’s new analysis (sizing and mapping) of the global financial intermediation system – the system that stores, transfers, lends, invests, and risk manages roughly $260 trillion in funds. The revenue pool associated with intermediation—the vast majority of which is captured by banks— was roughly $5 trillion in 2017, or approximately 190 basis points (Note as recently as 2011, the average was approximately 230 basis points). The report explores how this revenue pool could evolve over time.
Miklos Dietz, report author and McKinsey senior partner said We believe the lack of investor faith in the future of banking is tied, at least in part, to doubts about whether banks can maintain their historical dominance of the financial intermediation system. The report looks at the two forces – technological (and data) innovation and shifts in the regulatory and broader socio-political environment – that are reshaping the market structure of financial intermediation and the role of banks in this system. These dual forces of are opening great swaths of this financial intermediation system to new entrants, including other large financial institutions, specialist finance providers, and technology firms.
McKinsey sees the current complex and interlocking system of financial intermediation streamlined by the forces of technology and regulation into a simpler system over the coming years, with three layers:
Everyday commerce and transactions (eg deposits, payments, consumer loans). Intermediation here would be virtually invisible and ultimately embedded into the routine digital lives of customers.
The second layer would comprise of products and services in which relationships and insights are the predominant differentiators (eg M&A, derivatives structuring, wealth management, corporate lending). Leaders here will use artificial intelligence to radically enhance, but not entirely replace, human interaction.
The third layer will revolve primarily around business-to-business services where scale will be a key differentiator (eg parts of sales and trading, standardized portions of wealth and asset management)
Institutional intermediation would be heavily automated and provided by efficient technology infrastructures with low costs.
