Consultant: World's Biggest Banks Are in Deep Trouble

The world’s largest global banks are facing an existential crisis, and only drastic measures will save the ones bold enough to transform themselves into profitable businesses again, says McKinsey & Co.

Simply scaling back their headcounts isn’t the answer, either. The moves must be much larger, say the consultancy. From Bloomberg:

Firing people won’t be enough to save the world’s biggest banks from technological and regulatory changes that have reshaped the industry — whole businesses must go, according to McKinsey & Co.Almost every bank will have to quash aspirations to be all things to all customers so that they can eliminate fixed costs, the consulting company said Wednesday in a report titled “Time for Tough Choices and Bold Actions.” Only three to five global full-service banks will survive, McKinsey said.

With weak or negative revenue growth, major banks in the U.S. and overseas alike have struggled to prove their worth to shareholders since the financial crisis. Miniscule interest rates haven’t helped, because the dollar margins banks earn on loans are smaller when rates are low.

“It’s really time, except for a handful of banks, to change fundamentally the business model,” Roger Rudisuli, one of the authors, said in a telephone interview. “It’s fair to conclude that this industry overall isn’t earning an attractive return and is overall just not working.”

The global banking sector saw explosive growth as the financialization of everything began in the mid 1970s. What followed was an multi-decade era of incredible consolidation and record revenues and profits for major banks.

But since the finance crisis of 2008, everything has changed. Regulators have much stricter capital requirements, for example, and public perception of “too big to fail” banks has turned sharply negative. Perhaps most importantly, technological innovation has allowed consumers and businesses to operate outside of the control of traditional banks — and that trend will only accelerate in coming years.

“Too many banks continue to wait for salvation from revenue growth,” the consultants wrote in the report. “After seven years of underperformance, the time for waiting is over.”

Only time will tell who the survivors in the financial world will be, but one thing is for sure: the wholesale changes in the financial sector will have big consequences that many investors haven’t anticipated.

The Financial Select Sector SPDR Fund (XLF) was unchanged in premarket trading Wednesday. Year-to-date, the XLF has gained just 0.25%, versus a 4.58% rise in the benchmark S&P 500 index.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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