A “radical course of correction” in the banking industry, to boost shareholder returns, could lead to 20% of the world’s biggest banks being broken up or sold, according to a report from consultancy firm McKinsey.
The number of global universal banks currently stands at 25. However, McKinsey predicts that this could drop to fewer than 10 as banks begin to narrow their focus on products or regions, reports Bloomberg.
The report found that the global banking industry has shown some signs of progress in its “quest to return to sustained health and profitability”. The industry has improved its capital position, in 2007 tier-one capital ratio was 8.4%, increasing to 11.4% in 2011 and 12% in 2012.
McKinsey also noted that loan-loss provisions have returned to historical levels in many developed markets. It said, “Banks (and governments) have wound down a good proportion of assets they have assigned to ‘bad banks’.”
However, the consultancy firm added that these steps have not been enough to lift returns. Whilst the industry return on equity (ROE) increased from 7.9% in 2011 to 8.6% in 2012, this was largely driven by one-time changes in “goodwill and improvements in impaired assets”. As a result year-on-year banks’ operational performance have actually deteriorated.
McKinsey said banks should adopt a “back to basics” strategy, with fewer products, in order to compete in the current market and lower costs. Banks that grew on the back of strong growth before the financial crisis were also warned they may have to consider selling assets.
Fritz Nauck, a director at McKinsey and co-author of the report, said, “It’s not as if it can’t be done. It’s about how do the other banks get there or how does this consolidation start to being the overall industry up in terms of performance.”