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Contents
Executive summary
Introduction 7
Chapter 1:
More capital, but not yet a sustainable model
Chapter 2:
Earnings headwinds may increase
21
Chapter 3:
The triple transformation
31
41
Appendix 42
Executive summary
Welcome to the second edition of the McKinsey
Annual Review on the banking industry.
The global banking sector has made some pro
gress over the past year towards stabilizing after
the financial crisis. Banks have launched numer
ous initiatives to improve capital efficiency, reve
nues, and costs. However, the impact was not
reflected in 2011 earnings, due to the combined
impact of low interest rates and tightening capital
requirements. Further, the sector faces some
difficult choices going forward as it strives to
improve performance and regain the confidence
of investors and society. Amid tighter regulation,
shifting customer dynamics and macrovolatility,
the search for a sustainable model goes on. In
this report we examine the current state of the
sector, and present our view of the changes nec
essary to restore banks to the health and vigor
they are capable of achieving.
The report is presented in three chapters:
Chapter1 presents our view of the status of
the sector five years after the beginning of
the financial crisis. While progress has been
made, challenges remain.
Chapter2 examines the outlook for banking.
We expect the tough environment to persist,
with medium-term risks to performance out
weighing positives.
Chapter3 presents our vision of the way for
ward. A focus on return on equity (ROE) is
necessary, but not sufficient, and we suggest
a triple transformation may be required,
around banking economics, business models,
and culture.
Introduction
Nearly half a decade after the start of the global
financial crisis, the banking system remains
under pressure, amid a combination of regu
lation, technological change, and macrovolatility.
While banks have improved the health of their
balance sheets, they are still some way from
achieving a model capable of producing robust
and sustainable returns. Banks face a multi
tude of structural challenges, many of which
are unlikely to dissipate any time soon, while
revenues are still below precrisis levels. Banks in
developed markets are failing on average to earn
their cost of equity. On the key metrics of capi
tal efficiency, revenues, and costs, much work
remains to be done.
Chapter 1
More capital, but not yet a sustainable model
10
Exhibit 1
ESTIMATE
Other
US
Emerging Asia
Western Europe
Tier 1 ratio
Change
2007 - 2011
Tier 1 capital1
USD trillions
6.0
2007
2011
8.2%
11.7%
8.6%
11.8%
10.0%
10.0%
69%
7.5%
12.7%
37%
8.0%
11.7%
57%
5.5
5.0
4.5
58%
4.0
132%
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
2007
08
09
10
1 Upscale estimate, aggregation of all listed banks with available data in Reuters plus a 10% buffer for nonlisted banks
SOURCE: Thomson Reuters; McKinsey Global Banking Pools
2011
11
Exhibit 2
Since the start of the financial crisis banks have focused on balance sheet
ESTIMATE
management and have achieved significant deleveraging
Total banking assets to equity, multiple
35x
24x
25x
Western Europe
+3%
22x
21x
20x
-21%
21x
18x
17x
15x
16x
10x
2000
01
02
03
04
05
06
07
08
09
10
2011
Global average
Emerging Asia1
US
12
Exhibit 3
Capital efficiency
Ratio of on- and off-balance
sheet lending
100% = 81
Non13
financial
bonds
17
Securitized
loans
Nonsecuritized
loans
85
13
16
70
71
2010
2011
USD
tr
Revenue margin
Cost effectiveness
Before LLP
Cost-toincome ratio
3.2
After LLP
58
3.1
-0.1
2.7
2.7
60
Cost-toassets ratio
1.9
1.8
+1.5
2010 2011
2010 2011
2010 2011
2010 2011
Note: Cost ratios and margins (calculated over assets) are based on a sample of 193 banks with eligible data out of top 300 banks by
market capitalization
SOURCE: Thomson Reuters; McKinsey Global Institute; McKinsey Global Banking Pools
13
Exhibit 4
CAGR
2000 - 10
3.6
3.4
2010 - 11E
5%
3%
China
20%
10%
Other
emerging2
11%
12%
1.8
Other
developed3
5%
0%
1.2
Western
Europe
0%
-1%
US
2%
1%
3.1
2.8
3.0
2.4
3.3
2.1 2.1
2.2
2.3
3.0
2.5
0.6
0
2000
01
02
03
04
05
06
07
08
09
3.3
3.4
10 2011E
14
Exhibit 5
2011
2010
Cost-to-income ratio
Cost-to-asset ratio
67.7
US
3.1
67.7
Europe
63.9
1.5
1.5
55.8
Latam
Asia1
3.2
59.9
4.4
56.5
1.4
42.4
1.4
44.4
Global
4.8
59.8
58.3
1.8
1.9
15
Exhibit 6
16
15
14
14
12
10
8
8
9
ROE - COE
Latin
America
19
12 - 14
5-7
Asia3
17
10 - 12
5-7
Other
developed
10
9 - 10
US
8-9
Europe
9 - 10
0-1
-1 to -2
4
2
2000
4
02
06
08
2011
-9 to -10
16
Reuters: Special report - Chinas debt pileup raises risk of hard landing, October 10, 2011
Exhibit 7
ESTIMATE
Top performers1
Bottom performers2
30
Potential
outlook
20
10
0
Interim support via state subsidies
and central bank policies
-10
-20
2000
01
02
03
05
1 Top decile
2 Bottom decile
SOURCE: Thomson Reuters; McKinsey Global Banking Pools
07
09
11
2013
17
Exhibit 8
Developed
4.0x
Emerging
3.8
3.0x
> 2.0x
100
7
1.0x - 2.0x
27
100
20
2.3
39
2.0x
1.5
1.6
1.0x
< 1.0x
1.4
66
0.8
1.0
41
0.7
0x
2000
07
09
11 Q2
12
Developed
markets
Emerging
markets
18
19
20
Chapter 2
Earnings headwinds may increase
21
22
Exhibit 9
INACCURACIES ARE
DUE TO ROUNDING
France
UK
Germany
Italy
Preregulation
13.5
13.6
6.6
5.1
Basel III
-2.9
-2.8
-2.1
-1.4
EU mortgage
directive
-0.4
-0.4
-0.1
-0.3
EU payments
regulation (SEPA)
-0.2
-0.1
-0.1
-0.1
EU investment
regulation (MiFID 2)
-0.4
-0.5
-0.4
-0.1
Country-specific
regulation1
n/a2
-0.3
n/a2
Postregulation
9.5
3.6
3.1
-2.8
7.0
1 Germany: taxes and levies; establishment of a fee-based advisory model; UK: ICB ring-fencing, FSA on PPI, living wills, account switching/portability,
taxes, and levies
2 Country-specific regulation in France and Italy has either been implemented already in 2010 or has only low impact and therefore
has not been modeled
SOURCE: Day of Reckoning for European Retail Banking (McKinsey, July 2012)
23
See McKinsey White Paper Day of Reckoning for European retail banking, July 2012 (mckinsey.com)
9 See McKinsey Working Paper on Risk, Number 29 Day of Reckoning? New regulation and its impact on capital-markets
businesses, September 2011 (mckinsey.com)
Exhibit 10
2b Structured rates
30
3b Structured credit
17
Commodities
Cash equities
Prime services
Proprietary training
Total CM
8 - 11
11 - 12
~ 18
35
20
11 - 14
~ 11
15
15
9 - 11
7-8
8
27
~ 19
12 - 13
10 - 11
25
6b Structured EQD
~ 19
7-8
25
C Post-bus.- changes
11 - 12
20
6a Flow EQD
16
15
18
B Postmitigation
19
3a Flow credit
A Postregulation
Preregulation
FX
2a Flow rates
ESTIMATE
~ 11
~ 18
~ 11
12 - 13
13 - 14
11 - 12
12 - 13
11 - 12
11 - 13
11 - 12
12 - 14
10
10
10
24
10 See McKinsey White Paper Day of Reckoning for European retail banking, July 2012 (mckinsey.com)
11 2012 Edelman Trust Barometer
12 Shadow banking, as defined here, includes the following banking activities: advisory, issuances, underwriting, market making and
prop trading by nonbank players
Exhibit 11
SIFI bucket
(additional
Tier 1 capital)
Postregulation
pre-SIFI
Post-SIFI1
Bucket 1
(1%)
Bucket 2
(1.5%)
Bucket 3
(2%)
Bucket 4
(2.5%)
Bucket 5
(3.5%)
5.84
5.45
5.25
5.08
4.93
4.68
25
13 Eurostat
14 EFMA and McKinsey Mobile Banking survey
26
Exhibit 12
BASE CASE
Potential outlook
140
Western Europe
120
100
Asia1
-1%
+10%
Global average
US
80
2000
1 Excluding Japan and Australia
SOURCE: Thomson Reuters; McKinsey Global Banking Pools
2010
2020
27
Exhibit 13
Potential
outlook
Mexico crisis
6.0
5.0
Financial crisis
4.0
3.0
2.0
1.0
0
1980
1990
2000
2010
2020
28
29
Exhibit 14
-2.7
41.2
-1.1
12.2
Belgium
UK
Netherlands
Spain
Direct support
38.5
11.1
6.7
-1.1
6.8
-9.2
5.7
14.1
-3.4
Greece
US
Recovery
-2.1
-2.6
6.1
5.3
3.8
4.9
2.7
3.2
1.2
USD bn
Total direct
support1
Recovery
1,716
517
1 Cumulative direct support (utilized capital injection and purchase of assets and lending by treasury, including bad banks) since the beginning of the
financial crisis until Feb 2012, for some countries latest available data is as of Dec 2011
SOURCE: IMF Fiscal Monitor 4/2012
30
Chapter 3
The triple transformation
31
32
33
Exhibit 15
2010 2015
40
Multichannel
50
Digital only1
10
25
10
30
50
70
70
45
5
-26%
4-5
100
50
99
45
5
30
Call center
Service to sales
Conversion ratio
400
-50%
20
50
30
10
350
Support/
complaints
0 1
Digital interactions
2010: 100%
FTE/branch
475
40
20
Branch
Branch/million clients
Transactions/
info requests
Complex/large
15
+300%
+650%
34
Exhibit 16
CAGR
2007 - 10
100% =
Capital markets
Corporate
banking2
Transaction banking
3.4
10
3.3
8
16
15
16
18
-1%
3%
-6%
-17%
17
17
1%
2%
17
17
1%
6%
-2%
4%
-2%
6%
3.3
11
16
17
Asset management
Retail banking3
52
53
50
52
53
2007
08
09
10
2011
2010 - 11E
3.4
7
3.0
35
Exhibit 17
Back office
Customer
service
Sales
and advice
40
40
20
Online adaptors
Online leaders
32
18
24
31
58
37
78
51
-49%
100
36
Exhibit 18
ESTIMATE
2015F
2011
Share in percent of global HNW PFA (onshore and offshore, including life insurance and pension),
2011 - 15F
North America
35
Western Europe
Japan
26
11
32
Asia Pacific
(excl. Japan)
Middle East
23
Latin America
CEE
Africa
20
14
37
Exhibit 19
Productivity1
100
80
80
60
60
40
40
20
20
Cash FI and
money market
FX total
0
0
20
40
60
80
100
Revenues
20
40
60
80
100
Annual volume3
38
Exhibit 20
Alpha generator
Advanced
risk
enabler
Flow-driven New
universal
investment
bank
bank
Buy-side/nonbanks
Franchise bank
Risk-driven
business
Customer-centric
business
Infrastructuredriven business
Securities services
specialist
Advisory specialist
39
Exhibit 21
< 2x
Developed players
2 - 4x
> 4x
Profit
growth
Market
size
Market
share
Productivity2
3.4
1.9
0.9
1.9
3
Profit
growth
Market
size
Market
share
Productivity2
14.4
4.6
0.9
3.5
9.4
5.2
0.8
2.3
2.5
1.7
1.8
0.8
2.5
2.1
0.9
1.4
8.7
5.0
0.7
2.5
1.9
2.2
1.3
0.7
8.2
5.6
1.0
1.5
1.6
2.5
0.4
1.8
5.9
5.0
2.1
0.6
1.1
1.6
0.7
1.0
4.9
2.6
3.0
0.6
1 Relative changes, i.e. 100% means no growth in market size, constant market share or unchanging productivity
2 C/I and risk; productivity is defined as the ratio of profits over revenues, i.e. represents the ability to translate its revenues to profits in a cost effective way
3 2003 numbers have been used
SOURCE: Annual reports; McKinsey Global Banking Pools
40
Exhibit 22
Developed world
Emerging markets
ROE, percent
ROE, percent
50
50
y = 0.00001x + 0.0615
R2 = 0.0011
30
30
10
10
-20
y = 0.0003x + 0.1139
R2 = 0.0228
-20
0
1,000
2,000
3,000
200
400
600
41
42
Appendix
Technical appendix
1. Revenues. Total bank sector revenue pools
after risk costs, which includes all customerdriven revenues in a given country or region
2. Cost-to-income ratio. Operating expenses/
total revenue pools before annual provisions
for loan losses
3. Return on equity (ROE). Total accounting
net income after taxes/average common
equity
4. Capital ratio. Tier 1 ratio: calculated as Tier 1
capital/risk-weighted assets
5. Loan-to-deposit ratio. Total nonsecuritized
customer lending volumes/total customer
deposit volumes
17 Including OECD, ECB, the McKinsey Global Banking Pools, Reuters, and Bloomberg
43
44
Country financial
statistics statistics
Country
financial
$ billions, 2011
$ billions, 2011
Cross-border
capital flows
Country
Financial
depth/GDP
Government
Market capi- debt
Private debt1
securities
talization
Nonsecuritized
loans
Inflows
Outflows
Western
Europe
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Netherlands
Norway
Portugal
Spain
Sweden
Switzerland
United Kingdom
279%
321%
532%
241%
362%
293%
388%
548%
340%
533%
268%
410%
516%
371%
477%
463%
82
230
180
144
1,569
1,184
34
35
431
595
219
62
1,031
470
932
2,903
244
451
159
104
1,807
2,065
357
111
2,197
421
84
171
871
163
123
1,613
452
808
657
144
3,701
3,420
362
758
2,499
2,414
388
446
2,866
709
658
4,018
391
159
775
252
2,967
3,815
423
288
2,344
1,051
606
300
2,941
652
1,321
2,668
39
108
-7
137
25
104
11
-5
155
137
20
-11
99
57
25
389
49
100
10
125
-70
284
-15
-17
74
195
117
-24
54
99
129
370
Americas
Argentina
Brazil
Canada
Colombia
Mexico
Peru
United States
34%
156%
351%
128%
96%
116%
455%
44
1,229
1,907
201
409
79
15,641
91
1,009
1,218
98
316
34
12,875
16
680
1,033
12
261
13
31,316
61
968
1,939
108
126
74
8,790
19
133
160
27
58
12
784
12
81
108
17
29
7
380
Asia Pacific
Australia
China
Hong Kong
India
Indonesia
Japan
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Vietnam
318%
220%
572%
163%
92%
450%
324%
369%
155%
333%
306%
223%
141%
1,198
3,389
890
1,015
390
3,541
994
395
165
308
623
268
18
432
1,516
90
512
110
12,791
506
155
93
106
156
167
3
1,275
1,902
125
149
112
2,702
847
199
16
85
116
54
0
1,832
9,241
287
1,057
165
7,354
1,267
281
55
365
532
282
152
143
528
173
73
30
421
33
4
7
47
-33
25
14
98
694
187
32
28
551
60
53
13
84
64
30
7
CEE
& CIS
Croatia
Czech Republic
Hungary
Poland
Romania
Russia
Slovakia
Slovenia
Turkey
Ukraine
170%
125%
154%
142%
71%
99%
99%
182%
111%
101%
22
38
19
138
21
796
5
6
202
26
20
65
80
241
6
119
31
20
240
12
2
42
21
19
n/a
141
5
9
27
9
65
123
96
332
108
780
54
54
395
120
1
10
22
35
8
86
8
2
52
17
0
3
22
15
2
172
4
2
-13
8
Middle East
and Africa
Angola
Egypt
Kuwait
Morocco
Nigeria
Saudi Arabia
South Africa
United Arab Emirates
10%
53%
111%
182%
38%
106%
333%
138%
n/a
49
101
60
39
339
856
94
n/a
4
n/a
2
1
n/a
136
11
n/a
3
3
n/a
2
13
118
85
10
71
92
118
50
261
249
306
4
-17
-5
5
10
12
17
7
6
-22
33
0
7
104
11
36
1 Includes all corporate and financial bonds, as well as securitized loans; excludes nonsecuritized loans
Note: Numbers enclosed here are preliminary as of July 2012. Due to revisions in source data and methodological improvements, our 2010 base data may have changed since our 2011
report. For further details please feel free to contact us at gbp@mckinsey.com
45
Banking markets
Banking
markets
$ billions, 2011
$ billions, 2011
Region
Country
Revenue
pools3
Cost-toincome ratio
Profit pools4
Risk-to
cost ratio5
Loan-todeposit ratio6
Western
Europe
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Netherlands
Norway
Portugal
Spain
Sweden
Switzerland
United Kingdom
1.4%
1.2%
1.3%
0.9%
1.0%
1.2%
2.0%
1.3%
1.7%
0.8%
1.3%
2.0%
1.6%
1.1%
0.8%
1.1%
17.7
23.2
19.3
8.9
100.3
152.4
(1.0)
4.8
97.8
37.0
14.5
15.5
72.4
22.0
43.1
128.8
50%
68%
42%
55%
61%
66%
58%
47%
58%
50%
49%
43%
41%
47%
56%
49%
5.2
4.0
8.0
2.7
20.0
30.6
(7.5)
(2.3)
17.5
11.9
5.0
5.4
20.7
8.2
13.5
25.2
0.7%
0.4%
0.2%
0.2%
0.5%
0.3%
4.0%
2.4%
1.0%
0.4%
0.1%
0.9%
1.1%
0.2%
0.2%
1.4%
95%
81%
293%
138%
128%
90%
163%
127%
98%
96%
210%
99%
117%
193%
137%
68%
Americas
Argentina
Brazil
Canada
Colombia
Mexico
Peru
United States
7.6%
7.9%
2.1%
4.7%
3.9%
5.0%
1.4%
14.2
240.6
174.6
14.0
28.5
9.9
873.2
57%
54%
59%
46%
50%
55%
55%
3.3
62.0
52.4
4.3
8.6
2.9
149.6
2.8%
3.5%
0.4%
2.5%
2.2%
1.6%
1.7%
57%
119%
79%
119%
69%
63%
70%
Asia Pacific
Australia
China
Hong Kong
India
Indonesia
Japan
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Vietnam
1.3%
2.1%
1.1%
2.0%
3.7%
0.9%
1.9%
1.5%
2.1%
1.1%
1.2%
2.7%
3.6%
70.0
446.4
23.1
60.4
24.9
260.1
64.2
13.6
4.8
19.6
22.2
21.5
7.6
49%
49%
41%
48%
54%
55%
44%
49%
57%
48%
67%
48%
34%
20.7
146.6
10.7
18.9
7.7
72.5
23.4
4.4
1.2
7.3
4.1
6.9
2.9
0.6%
0.8%
0.6%
0.6%
1.0%
0.4%
0.9%
1.3%
1.3%
0.5%
0.7%
0.9%
2.2%
104%
71%
29%
75%
87%
55%
100%
108%
51%
75%
78%
108%
103%
CEE
& CIS
Croatia
Czech Republic
Hungary
Poland
Romania
Russia
Slovakia
Slovenia
Turkey
Ukraine
2.5%
2.7%
3.4%
2.5%
3.0%
3.7%
2.7%
2.1%
4.6%
7.2%
3.0
9.1
2.9
17.7
1.6
46.7
3.4
1.6
30.1
3.5
42%
47%
52%
52%
65%
46%
52%
44%
38%
47%
1.4
3.4
(1.6)
5.9
(1.9)
12.6
1.1
0.2
13.6
(1.9)
0.4%
1.0%
6.1%
0.9%
4.7%
2.7%
1.2%
2.9%
1.4%
9.6%
148%
78%
138%
125%
149%
92%
103%
156%
111%
186%
Middle East
and Africa
Angola
Egypt
Kuwait
Morocco
Nigeria
Saudi Arabia
South Africa
United Arab Emirates
5.4%
2.1%
1.3%
0.9%
6.9%
1.8%
2.9%
2.1%
1.6
3.9
9.1
7.3
7.8
9.8
19.7
11.0
42%
71%
36%
60%
74%
32%
53%
32%
0.5
(0.2)
5.3
1.7
1.0
5.7
4.9
5.8
2.3%
2.7%
1.6%
1.2%
1.8%
1.1%
1.4%
1.4%
39%
42%
77%
86%
65%
88%
154%
95%
1 All figures sourced from GBP database, representing customer-driven banking figures. Different from reported results, noncustomer-related results (such as ALM, prop. trading) are excluded
2 Calculated as total customer-driven revenue pools before provisions for loan losses/total customer-driven volumes (at average of period) as it is available in global banking pools
3 Revenue pools after provisions for loan losses
4 Profit pools after tax
5 Loan loss provisions/total retail and wholesale loan volumes (at average of period)
6 Calculated as nonsecuritized loans/deposits (at end of period)
Note: Numbers enclosed here are preliminary as of July 2012. Due to revisions in source data and methodological improvements, our 2010 base data may have changed since our 2011
report. For further details please feel free to contact us at gbp@mckinsey.com
46
Authors
Toos Daruvala
Director
New York, USA
Toos_Daruvala@mckinsey.com
Joydeep Sengupta
Director
Singapore, Singapore
Joydeep_Sengupta@mckinsey.com
Miklos Dietz
Principal
Budapest, Hungary
Miklos_Dietz@mckinsey.com
Matthias Voelkel
Associate Principal
Frankfurt, Germany
Matthias_Voelkel@mckinsey.com
Philipp Hrle
Director
London, UK
Philipp_Haerle@mckinsey.com
Eckart Windhagen
Director
Frankfurt, Germany
Eckart_Windhagen@mckinsey.com
We are grateful for the advice and input of many McKinsey colleagues, especially Tommy
Jacobs, Charles Roxburgh, Renny Thomas, and Paal Weberg. Further, wed like to thank our
team members Krisztina Bakor, Franca Kemmerer, Tamas Nagy, Christoph Promberger,
Markus Rhrig, Christian Schaette and Himanshu Singh, who performed all analyses and
smoothly coordinated this effort. Lastly, we appreciate the work of our editors Terry Gilman
and David Wigan.