Unsurprisingly, resilients are almost all in Western Europe and developed Asian markets such as Japan, which have been the toughest banking markets over the past three years. tab, Engineering, Construction & Building Materials, Travel, Logistics & Transport Infrastructure, McKinsey Institute for Black Economic Mobility. Download the full report We exclude hedge funds and publicly traded or open-end funds. To put some hard numbers against what may seem like a distant threat to some banking leaders, we calculated the value at stake for global banking should platform companies successfully split banking in two (Exhibit 5). Social Responsibility Report 2018 We strive to provide individuals with disabilities equal access to our website. Perhaps more significant, our survey data show a clear uptick in the value that managers attribute to ESG—in other words, they increasingly find that these factors are positive (or neutral at worst) in achieving strong performance. Meanwhile the pressures of digitization, which boosts competition and compresses margins, are growing. The way that LPs and GPs respond to the challenges and opportunities of scale will be critical to their success. Welcome to the 2020 edition of McKinsey’s annual review of private investing. To that end, exploring opportunities to merge with banks in a similar position would be the shortest path to achieving that goal. Digital attacker. A scale leader in the right geography as a broker dealer still doesn’t earn the cost of capital. 2019 Annual Report. our use of cookies, and In these areas, machine-learning algorithms using a combination of traditional and nontraditional data have demonstrated the ability to estimate target variables (such as rents) with accuracies that can exceed 90 percent. Take the case of broker dealers in the securities industry, where margins and volumes have been down sharply in this cycle. If growth in dry powder continues to outstrip deal volume in a strong market, this may provide a tailwind for multiples. Endowments are already heavily allocated to private markets and do not appear keen to switch out. Our flagship business publication has been defining and informing the senior-management agenda since 1964. The result will be a financial sector that is more efficient and delivers value to customers and society at large. But, notwithstanding the academic literature, Please email us at: McKinsey Insights - Get our latest thinking on your iPhone, iPad, or Android device. Be it scale across a country, a region, or a client segment. Remarkably, the industry’s record-setting 2017 growth is attributable to a single subasset class in one region. Banks’ position in this system is under threat. We project that in the base-case scenario, loan-loss provisions (LLPs) in coming years will exceed those of the Great Recession. Even at current levels, LPs appear to be under-allocated versus target levels by more than $500 billion in PE alone—as much as the global amount raised for PE in 2019. Sub Title. The odds are seemingly against banks’ ability to get the jump on the world’s most advanced tech companies. A European venture-capital (VC) firm has built a machine-learning model to analyze a database of over 400 characteristics of more than 30,000 deals, identifying about 20 drivers of success for various deal profiles. But the new strategies adopted by the aforementioned platform companies are even more challenging for incumbent banks. McKinsey’s annual review reveals an expanding and developing industry. Corporate … Harnessing the new powers of data-driven marketing, a digital workbench for sellers, robotic process automation, the cloud, application programming interfaces and apps, and all the other tools now available is an essential step for banks. Download A new decade for private markets, the full report on which this article is based (PDF–9.2MB). Branch bankers can perform their traditional teller tasks with some portion of their time. We'll email you when new articles are published on this topic. Private asset managers raised a record of nearly $750 billion globally, extending a cycle that began eight years ago. The focus now needs to shift toward increasing their share of wallet among current customers by extending their proposition beyond traditional banking products. “Distribution,” on the other hand—the origination and sales side of banking—produced 47 percent of revenues and 65 percent of profits, with an ROE of 20 percent. Women in the Workplace is the largest study on the state of women in corporate America. Several factors are responsible, starting with a slowdown in revenue growth (Exhibit 1). President and Chief Operating Officer . McKinsey & Company's top competitors are Accenture, PwC and EY. Banks must adapt to the reality of a macroeconomic environment that offers a number of risks and limited upside potential. All while building the talent and the advanced data-analytics infrastructure required to compete. Each bank is unique. ... its second highest annual net revenues. As part of this work, banks will need to retrain some branch bankers, in part by conceiving flexible roles that mix on-site and remote work, such as the customer-experience officer. Industrializing regulatory and compliance activities alone could lift ROTE by 60 to 100 bps. On the supply side, we expect banks to become more selective in their risk appetite. They are structurally more profitable than their developed-market counterparts, with ROEs well above the 10 percent cost of capital in most cases but vulnerable to the credit cycle. New McKinsey research shows that while most fund managers consider cyclical risk as part of their due diligence and portfolio management processes, only a third have adjusted their portfolio strategy to prepare for a potential recession. However, they should remain alert to the possibility of a compelling distressed asset becoming available. As mentioned earlier in this report, there is an urgent need to find areas where they can actually add value and get rewarded as their core business economics fall. BoF’s insider knowledge with McKinsey’s global expertise and analytical rigour, and then survey more than 270 global fashion executives and interview many of the industry’s thought leaders and pioneers. Fully 90 percent of LPs said recently that private equity (PE), the largest private-asset class, will outperform public markets in coming years—despite academic research that suggests such outperformance has declined on average. As an essential first step, those that have not yet fully digitized must explore the new tools at their disposal and build the skills in digital marketing and analytics that they need in order to compete effectively. That is a future that should energize any forward-looking banking leader. The global banking industry shows many signs of renewed health. Even before the crisis, leading banks in developed markets had achieved 25 percent less branch use per customer than their peers by migrating payments, transfers, and cash transactions to self-service and digital channels. INSEAD Annual Report 2018/2019. Some 36 percent of banks globally have earned a mere average of 1.6 percent ROTE over the past three years. Advanced analytics and artificial intelligence are already producing new and highly effective risk tools; banks should adopt them and build new ones. Read more . Banks, like other sectors of the economy, may face a cold winter ahead, but there is the promise of a thaw. Resilients have been strong operators and risk managers that have made the most of their scale in what have been challenging markets, due to either macroeconomic conditions or to disruption. The four archetypes are defined by two dimensions: the bank’s strength relative to peers and the market stability of the domain within which the bank operates (Exhibit 3): To identify the degrees of freedom relevant for each bank archetype, we assessed who they are, or a description of how banks in each archetype have performed economically in recent years (Exhibit 4), and where they live, or the underlying health of the markets in which they operate (Exhibit 5). Lastly, many banks have been able to digitize processes and dramatically lower costs in their middle and back offices (although digitization can sometimes add costs). In fact, in this and other ways, the industry is overcoming its growing pains and finding new ways to deliver for its investors. In our base-case scenario, $3.7 trillion of revenue will be lost over five years—the equivalent of more than a half year of industry revenues that will never come back. A decade after a financial crisis that shook the world, the global banking industry and financial regulators have worked in tandem to move the financial system from the brink of chaos to a solid ground with a higher level of safety. Of course, there will be offsetting positive effects for the industry, such as a need to refinance existing debt, and some regions and industry segments will still benefit from secular tailwinds. Control costs in risk, finance, legal, and compliance have shot up in recent years. More investors believe that private markets have become effectively required for diversified participation in global growth. Find detailed stats on McKinsey revenue on Craft. Download Global Banking Annual Review 2017: The Phoenix Rises: Remaking the Bank for An Ecosystem World, the full report on which this article is based (PDF—1MB). Our research indicates that, in the past couple years, the industry’s largest firms have begun to collect a growing share of capital, perhaps starting to consolidate a fragmented industry. Practical resources to help leaders navigate to the next normal: guides, tools, checklists, interviews and more, Learn what it means for you, and meet the people who create it, Inspire, empower, and sustain action that leads to the economic development of Black communities across the globe, Ten months into the COVID-19 crisis, hopes are growing for vaccines and new therapeutics. The call to action is urgent: whether a bank is a leader and seeks to “protect” returns or is one of the underperformers looking to turn the business around and push returns above the cost of equity, the time for bold and critical moves is now. The second layer would also comprise products and services in which relationships and insights are the predominant differentiators (for example, M&A, derivatives structuring, wealth management, corporate lending). So, the challenge—and the potential—of manager selection remains paramount for institutional investors. New digital entrants are also having an impact on bank performance, particularly by threatening the customer relationship and margin erosion across retail segments. Please try again later. cookies, McKinsey_Website_Accessibility@mckinsey.com, The rise and rise of private markets: McKinsey private markets annual review, A routinely exceptional year: McKinsey Global Private Markets Review. What was interesting in 2017, however, was the way in which an already-powerful trend accelerated, with raises for all buyout megafunds up over 90 percent year on year. Leading banks are using machine learning to study every node of the network, with particular attention to demographics, ATM proximity, and nearby competitors. Private market assets under management (AUM) grew by 10 percent in 2019, and $4 trillion in the past decade, an increase of 170 percent (Exhibit 1), while the number of active private equity (PE) firms has more than doubled and the number of US sponsor-backed companies has increased by 60 percent. Meanwhile, fundraising in middle-market buyouts (for funds of $500 million to $1 billion) grew by 7 percent, a healthy rate after years of solid growth. Women represent just 20 percent of employees across the private markets and less than 10 percent in investment team leadership positions. Furthermore, if they are to be among the 37 percent of follower banks that become leaders regardless of the market environment, now is the time to build the foundation, as they still have time to benefit from the excess capital that operating in a favorable market gives them. Consider the last imperative, and one aspect in particular: climate change. April 30, 2020 . With price tags increasingly printed on gold foil, GPs had to be smarter with their investment decisions and more strategic with their choices. A decade after the crisis, these accomplishments speak to the resiliency of the industry. In addition to those who were already digital-only customers previously, another 10 to 15 percent of customers will be unlikely to use a branch after the crisis, further increasing the need to act. There were 1,802,398,289 shares of common stock outstanding as of November 13, 2019. Although the deal volume of $1.3 trillion was comparable to 2016’s activity, deal count dropped for the second year in a row, this time by 8 percent (Exhibit 2). The recovery from the financial crisis is—at long last—complete, capital stocks have been replenished, and banks have taken an ax to costs. hereLearn more about cookies, Opens in new Digital attacker. Meet the leaders driving organisational excellence at INSEAD. The pressure to act is real and should not be discounted. In fact, as our colleagues first mentioned in the 2015 edition of this report, the industry is bogged down in a flat and uninspiring performance rut. And they have achieved this leadership without having to focus too much on improving productivity, as reflected in their average cost-to-asset ratio (C/A) of approximately 220 bps. We also look at the industry’s performance over the past 50 years, analyze historic downturns and apply that history to recent events. Rules-based workers can be redeployed in different roles, based on assessed skill adjacencies. Branch networks have expanded and shrunk over the years, but the COVID-19 crisis demands that banks move beyond the heuristics that have prompted shifts in recent years. In numerical terms, the global Tier 1 capital ratio—one measure of banking-system safety—increased from 9.8 percent in 2007 to 13.2 percent in 2017. Geospatial analyses help it evaluate the strength of its footprint. Banks that can go further and create their own platforms might capture a small share of some nonbanking markets, which would elevate their ROE to about 14 percent—far above the current industry average. This article was edited by Mark Staples, an executive editor in McKinsey’s New York office. On the latter, followers, which have underperformed their peers in buoyant markets, should also reevaluate their portfolios and dispose of nonstrategic assets before the market turns. The need of the hour is to industrialize tasks that don’t convey a competitive advantage and transfer them to multitenant utilities. Most of the value creation is coming from banks that adhere to one of five distinctive strategies. Reinvent your business. Select topics and stay current with our latest insights. Potentially high-value mergers within this segment are of two kinds: first are mergers of organizations with completely overlapping franchises where more than 20 to 30 percent of combined costs can be taken out, and second are those where the parties combine complementary assets, for example, a superior customer franchise and a brand on one side and a strong technology platform on the other. Flip the odds. It has shaken off concerns about adverse selection to become an effectively standard dimension of pricing. The rest—more than 60 percent—is due to the business model and its execution, strategy, well-aligned initiatives, and the other levers that banks command. Even in an adverse scenario, we estimate that CET1 ratios would fall only an additional 35 to 85 basis points, depending on region. But our 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. Further, sellers have more options, notably secondaries; investors are more committed to pacing plans; and co-investment has replaced the ill-starred club deal. It issues credit cards to tens of millions of members. Read more . Then, amid a muted global recovery, banks will face a profound challenge to ongoing operations that may persist beyond 2024. Banks will surely be affected, as credit losses cascade through the economy and as demand for banking services drops. Reinvent your business. Graduates Annual salary Number Percent Mean Median High Low . . With an average C/A ratio of 130 bps, challenged banks as a group still have a good 50 bps to cover before they produce the best-in-class cost bases we’ve seen from Nordic banks. Underlying constraints of a business model also have a significant role to play. Something went wrong. People in northern climates know that winter tests our endurance, skills, and patience. Done well, they can find quasi-proprietary deals in which to deploy large sums of capital while enabling GPs to eat their cake and have it too by recognizing gains while maintaining some degree of upside over time. Yield curves are also flattening. Download Private markets come of age, the full report on which this article is based (PDF–5MB). Likewise, Alibaba is not just an enormous e-commerce company; it is also a large asset manager, lender, payments company, B2B service, and ride-hailing provider. Priorities for the late cycle. Variability in performance remains substantial, however (Exhibit 2). Capital deployment mirrors and even exceeds the surge in fundraising, up an average of 17 percent per annum since 2015, capped by a 53 percent increase in 2018, when the industry invested $251 billion. Domicile is mostly out of a bank’s control. Now it is corporate banking’s turn, with collaborations between Standard Chartered and GlobalTrade, Royal Bank of Scotland and Taulia, and Barclays and Wave showing that when innovation meets scale, good things can happen. Please use UP and DOWN arrow keys to review autocomplete results. (Note, however, that as a multiple of annual equity investments over the prior three years, dry-powder stocks have crept noticeably higher, growing 22 percent since 2016. Public interest and LP pressure to take environmental, social, and governance (ESG) factors into account in investing have soared, prompting greater transparency on ESG policies and performance as well as a rise in dedicated “impact funds.” Nine of the ten largest GPs now publish annual sustainability reports. For challenged banks, the sense of urgency is particularly acute given their weak earnings and capital position; banks in this group need to radically rethink their business models. Geography, however, is no longer destiny. And the industry’s conduct has changed with its context. Furthermore, on the cost front, resilients need to pay closer attention to opportunities for improving productivity by exploring the bankwide appetite for ZBB. These funds are injecting liquidity and creativity into the marketplace, helping limited partners (LPs) shift strategies and manager lineups more quickly, and more than ever, helping general partners (GPs) restructure and extend legacy funds. Private markets complete an impressive decade of growth. But on balance, the global industry approaches the end of the cycle in less than ideal health, with nearly 60 percent of banks printing returns below the cost of equity. Unlike many past shocks, the COVID-19 crisis is not a banking crisis; it is a crisis of the real economy. A few large institutions have While the global banking industry has achieved a modicum of stability over the past several years, earning a record $1 trillion in 2014 and recording a 9.5% return on equity for the third consecutive year, banks now face rising competitive threats on all sides as new technology companies and others seek to poach their customers. Along with stagnating growth, banks face enormous challenges to digest the wave of postfinancial-crisis regulation, despite industry hopes of a more benign regulatory environment in the United States. If you would like information about this content we will be happy to work with you. Industry performance has been strong, but manager selection remains paramount. Use minimal essential We see new evidence of those trends—and they are happening faster than we expected. McKinsey’s Private Equity and Principal Investors Practice is pleased to publish A routinely exceptional year: McKinsey Global Private Markets Review (PDF–1.30MB), which details these and many other findings. It now stands at a record $2.3 trillion (Exhibit 3). On the positive front, a number of banks are teaming up with fintech and digital firms, using big data and analytics to sharpen risk assessment and drive revenue growth. The first item on their agenda, just like market leaders, should be to focus on increasing their share of wallet among their current customers through enhanced customer experience (CX) and by building a value proposition that extends beyond the traditional set of banking products. 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