McKinsey report: restructure, earn more, cost less
Banks in developed markets will have to restructure, double profits and cut costs dramatically in the next four years if they want to stand a chance
McKinsey report: restructure, earn more, cost less
Banks in developed markets will have to restructure, double profits and cut costs dramatically in the next four years if they want to stand a chance of competing against leaner emerging market competitors, a report published by the management consultancy McKinsey has warned.
The report said the return on equity of US and European banks at 7% and 7.9% respectively was lower than their cost of capital, which is about 12%. In comparison, the average return on equity for emerging market banks is 19.6% and they are expected to achieve an estimated annual growth rate of 10% over the next decade.
The report said European banks must double their profits each year until 2015, while US banks have to improve their profits by an even larger margin if they want to achieve a return on equity equal to their cost of capital.
Stefano Visalli, director at McKinsey and one of the report’s authors, said: “This return gap is enormous. It is bigger than the total profits of the global pharmaceutical and automotives industries put together.”
Unless current practices and models are tackled, the return on equity of developed market banks will continue to trail the cost of capital even before the industry has digested additional capital requirements from Basel III and other regulations.
The report recommended that banks should cut their costs by 6% each year until 2015. Only six of the 300 largest global banks examined for the report had managed to cut costs by 4% or more in the previous 10 years.
Visalli said: “To achieve this will require a radical break with past trends for an industry that has never before decreased costs in absolute terms; in the next years it may need to reduce them by 15% to 25% as well as increasing revenues.