Global banking sector could lose up to $4.7tn revenue over four years due to Covid-19

The global banking industry could lose between $1.5 trillion to $4.7tn in cumulative revenue between 2020 and 2024 because of the effects of Covid-19, according to a new report from consultancy McKinsey.

Banks will need to fundamentally reinvent their business models to sustain a long period of zero or near-zero per cent interest rates and other economic challenges, according to McKinsey's latest Global Banking Annual Review.

“Middle East banks have also been severely impacted across all levers, i.e. margin decline, demand slowdown and increased credit losses. However, capital and liquidity positions remain strong, allowing these institutions to weather the storm,” said Jawad Khan, McKinsey’s banking practice leader in the Middle East.

“Challenges will remain in the mid-term, but this is the time for banks to re-think their operating model to drive productivity and become even more capital-efficient.”

Governments around the world have provided $12tn in fiscal stimulus measures to support the global economy from the fallout of Covid-19, with central banks adding a further $7.5tn in monetary measures as at the end of September, according to the International Monetary Fund.

However, this has come at a cost to lenders as lower interest rates push down the margins they can make from offering loans to customers.

McKinsey's report argued that banks face a two-stage problem. The first will be severe credit losses, likely to last until late next year.

The extended lockdowns in some cities globally will result in people and businesses unable to keep up with their payment obligations, resulting in increased personal and corporate defaults. Global banks have provisioned $1.15tn for loan losses through the first three quarters of 2020, surpassing those for all of 2019, McKinsey found.

“We project that in the base-case scenario, loan-loss provisions in coming years will exceed those of the [global financial crisis],” the consultancy said.

In the second stage, amid a muted global recovery, banks will face a “profound” challenge to ongoing operations that “may persist beyond 2024”, the consultancy said.

“On an absolute basis, compared with pre-crisis growth projections, the Covid-19 crisis may cost the industry $3.7tn – the equivalent of more than a half year of industry revenues that will never come back.”

McKinsey also estimated that banks’ return on equity would continue its decline, from 8.9 per cent in 2019 to 4.9 per cent in 2020 and 1.5 per cent in 2021.

The industry is sufficiently capitalised to withstand likely credit losses, with average tier-1 equity capital ratios due to fall to 10.9 per cent next year from 12.5 per cent last year, before recovering to 12.1 per cent by 2024, McKinsey estimated.

With banks expected to remain stretched, the consultancy outlined three ways for financial institutions to rebound. They must embed speed and agility into their practices, reinvent business models to sustain “a long winter of zero per cent interest rates” and weave in more environmental, social and governance practices into their operations.

“Banks will need to act quickly to return to pre-crisis RoE levels, in a far more challenging environment than the decade just past,” said Marie-Claude Nadeau, McKinsey partner and report co-author.

“The trade-off between rebuilding capital and paying dividends will be stark,” Ms Nadeau added.

Banks will also need to accelerate the shift to digital operations and reconfigure their branch networks, where demand has softened. The McKinsey report found that in the past year, the use of cash and cheques has eased; in most markets, about 20 to 40 per cent of consumers report using significantly less cash.

Although customer interest in digital banking has increased in many markets, this trend varies widely. In the UK and the US, only 10 to 15 per cent of consumers are more interested in digital banking than they were before the crisis, while in Greece, Indonesia, Mexico and Singapore, the “more interested” share ranges from 30 to 40 per cent, McKinsey research found.

“Banks will need to retrain some branch bankers, in part by conceiving flexible roles that mix on-site and remote work. Branch bankers can perform their traditional teller tasks with some portion of their time. With the remainder, they can get trained on new skills to become contact centre agents,” the consultancy said.