Global Banks Experience Record Profit Boost in 2022 Amid Uncertain Margins
The global banking industry has witnessed a significant profit boost of $280 billion in 2022, marking its best performance since the 2008 global financial crisis, according to a report by consulting firm McKinsey & Co. This remarkable surge in profits can be attributed to rising interest rates, which were facilitated by monetary authorities worldwide. In response to this windfall, many banks have announced plans for substantial share buybacks.
Despite the positive developments, McKinsey’s Global Banking Annual Review has sounded a note of caution regarding the future outlook for net margins. While the return on equity increased from the average of 9% since 2010 to 12% in 2022, the consultancy firm warns that a return to ultralow spreads in the short term seems unlikely, leaving the prospects for net margins uncertain.
Moreover, the banking sector faces growing competition from non-traditional institutions, which often operate with less regulation than traditional banks. The report highlights that between 2015 and 2022, more than 70% of the net increase in financial funds belonged to insurance and pension funds, sovereign wealth funds, private capital, and alternative investments rather than banks.
This trend has created a tipping point, causing the traditional core of the banking sector—the balance sheet—to come under pressure. As this shift continues, governments are widening their scrutiny of non-traditional financial institutions due to concerns about the macroeconomic system’s stability, as indicated by the report.
Additionally, the report notes a divergence in performance among different regions. Banks in the Indian Ocean region, including Singapore, India, Dubai, and parts of eastern Africa, house half of the world’s best-performing banks. Meanwhile, banks in Europe, the United States, China, and Russia have struggled to generate sufficient returns to cover their cost of capital.
The report also sheds light on valuations, revealing that banks’ valuations at 0.9 times price-to-book have remained unchanged since the global financial crisis, with a noted historic gap compared to the rest of the economy. This reflects the challenges faced by the sector but also presents potential opportunities for future growth.
The report specifically highlights the difficulties faced by Chinese banks, stating that major Chinese banks are trading at 0.5 times book value and have limited prospects for achieving higher returns. McKinsey suggests that artificial intelligence (AI) could serve as a game changer for banks, potentially reducing operational costs by an estimated $200 billion to $300 billion.
In conclusion, the global banking industry experienced an extraordinary profit surge in 2022, largely driven by rising interest rates. However, the future remains uncertain as net margins face challenges, competition from non-traditional institutions grows, and regional performance varies. While Chinese banks face tougher times ahead, the adoption of AI technology presents an opportunity for cost reduction. The sector continues to navigate a changing landscape, with governments increasing oversight of non-traditional financial institutions to ensure a stable macroeconomic system. It remains to be seen how banks will adapt to these evolving dynamics and seize potential upside in the future.
