One-fifth of the world’s biggest banks may be broken up or sold as part of a “radical course correction” to boost shareholder returns, according to McKinsey & Co.
The number of global universal banks may drop to fewer than 10 from about 25 as they narrow their focus on products or regions, the consulting firm said in an annual review of the industry released today. Ninety global lenders are generating higher returns by following one of five distinct strategies described by McKinsey, according to the report.
“It’s not as if it can’t be done,” Fritz Nauck, a director at the consulting firm and a co-author of the report, said in an interview yesterday. “It’s about how do the other banks get there or how does this consolidation start to bring the overall industry up in terms of performance.”
Global banks’ return on equity climbed to 8.6 percent in 2012 from 7.9 percent a year earlier, still below the 10 percent to 12 percent average cost of equity, a measure of the minimum return required by shareholders, McKinsey said in the report.
U.S. banks earned an average return of 8 percent last year and European lenders earned 2 percent, excluding those in the most indebted nations such as Spain and Greece, according to the report titled “Breakaway: How Leading Banks Outperform Through Differentiation.”
Online Competitors
Higher capital requirements, slow economic growth and increasing demands by national regulators that have reduced international capital flows and trade have put pressure on banks’ performance, according to the report. New rules such as the supplementary leverage ratio and the emergence of online competitors are also threats, McKinsey said.
The 90 banks that outperformed earned a 15 percent return on equity, or ROE, and their share prices traded at an average of two times book value, twice the price-to-book value of the rest of the 500 banks the consulting firm reviewed.
The five strategies that McKinsey outlined were universal banking, “investment specialists” that have scale in wealth management or payments processing, lenders that offer superior service and can charge a premium, being a leader in a rapidly growing market, and a “back-to-basics” model that features fewer products and lower costs.
More companies will need to pursue the “back-to-basics” strategy by limiting the industries they serve and dropping marginal consumer products such as student and boat lending, Nauck said. U.S. banks such as Comerica Inc. and M&T Bank Corp. have succeeded with lower margins by cutting costs and maintaining a “no surprises” balance sheet, the report said.