Global banking industry could lose up to $4 trillion in revenues

21 December 2020 4 min. read
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The next five years will pose unprecedented challenges to global banking, with heavy credit and revenue losses. The good news, according to McKinsey & Company, is that most will survive the crisis and recover within half a decade. 

For now, the numbers paint a dire picture. An economic recession is in full force globally, keeping spending at a marked low and intensifying credit defaults. Banks are in the direct firing line here, as they stand to lose from dampened investment activity, low transaction volumes and missed loan payments.

“Our research finds that in the months and years to come, the pandemic will present a two-stage problem for banks. First will come severe credit losses, likely through late 2021. Then, amid a muted global recovery, banks will face a profound challenge to ongoing operations that may persist beyond 2024,” noted Kevin Buehler, senior partner at McKinsey & Company in New York.

The road ahead for global banking

“Depending on scenario, from $1.5 trillion to $4.7 trillion in cumulative revenue could be forgone between 2020 and 2024. In our base-case scenario, $3.7 trillion of revenue will be lost over five years—the equivalent of more than a half year of industry revenues that will never come back.”

Credit losses

By the third quarter of this year, banks had provisioned for credit losses of well over $1 trillion – higher than the provision threshold for all of 2019. According to the report, this is just the beginning. Credit losses so far are pinned on millions of business closures and job cuts, made worse by second and third infection waves and lockdowns in major markets.

Credit loss provisions till 2024

And this is amid a cushioned business environment, helped along by steady inflows from government stimulus packages and a range of other support measures. As the months progress – particularly with the vaccine rollout finding its legs – these measures will ease up in the near future, leaving several businesses in the lurch.

Loan payments in this scenario will only get more challenging as the years progress. In fact, McKinsey expects that credit loss provisions in the lead up to 2024 will rocket past levels reached during the Great Recession in 2008.

Revenue losses

Against this backdrop, interest rates have been hovering in and around 0% since the start of the crisis, and are unlikely to shoot up any time soon. For banks, this means evaporating profitability, and many will be forced to build capital reserves and rethink their business models for survival – among other challenges.

Banks could lose $4 trillion by 2024

“The trade-off between rebuilding capital and paying dividends will be stark, and deteriorating ratings of borrowers will lead to inflation of risk-weighted assets, which will tighten the squeeze,” Buehler said. As banks grapple with these challenges, revenues are unlikely to recover until 2024, or 2022 in the best-case scenario.

Silver lining

The good news is that banks will recover, and will likely resume 2019 revenue levels by 2024. Several factors are at play here. For one, Covid-19 is not an industry crisis for banking per se, but a wider economic crisis that has a direct bearing on banks. Internally, banks actually went into 2020 with strong economic fundamentals and vast capital reserves. 

This is enough to ensure that most banks will survive the tough times ahead. No doubt, some regions and economic segments might bounce back stronger than ever in the next year or so, depending on how they are positioned in the new normal. For banks, the task is to be present where and when this resurgence unfolds.

“Banks, like other sectors of the economy, may face a cold winter ahead, but there is the promise of a thaw. The moment is right for banks to affirm their dual role as sources of stability against the pandemic’s upheaval and as beacons to the societies and communities they serve in a post-COVID-19 world,” concluded Buehler.