Global banking facing 'anaemic' revenues a decade on from financial crisis

15 November 2018 5 min. read

A new study has found that banking revenues across the world have collapsed since the global financial crisis, as industry growth is running at less than half the historical average. UK banks in particular have struggled to recover their former size, with much of it having been linked to the nation’s property bubble pre-2008.

A decade has passed since the 2008 global financial crisis, but the banking sector is yet to recover its size from before the first great economic crash of the 21st century. According to a recent study by Accenture, in 2005, there were 24,000 players in the worldwide banking industry; however thanks to an exit of some 8,300 players – contrasting with an arrival of 600 FinTechs, 1,900 payment institutions, 700 banks licensed after 2005, and 400 subsidiaries of incumbent banks being created in a bid to separate risk at major financial players after the 2008 global crash – 19,300 banking sector players exist now.

Now, another analysis from global management consultancy McKinsey & Company has suggested that the revenues of banks have also declined drastically compared to last decade. McKinsey found that investment banks made revenues of $275 billion last year, a figure that stood at $345 billion in 2007. According to the firm, this is because the majority of banking entities have struggled to increase their return on equity, which helps measure profitability, since the crisis.

On avarage, Europe's private investment recoveries are running late by historical standards

The global figure has lingered around 8% or 9% since 2012, thanks largely to the performance of US players. Last year, the average return on equity for European banks was especially bad, dipping to 5.6%, according to figures from the European Banking Federation. This is the highest figure for European financial institutions since 2007, but still stands at less than half of the pre-crisis high of 10.6%. At the same time, disruptive entities in wealth and asset management and corporate and commercial banking have grown significantly, further constricting investment banking’s revenues.

Meanwhile, private investment saw another large drop thanks to busts in the construction and real estate arenas. The UK and Spain saw the largest individual falls in this regard, with more than 50% of their respective tumbles related to construction and real estate. This was largely thanks to an unsustainable property market which ballooned in the years approaching 2008, and McKinsey noted that a return to this would not necessarily be expected or desired. However, it does leave banks with a conundrum as to where else to make these figures back from.

The report comes amid a growing number of investment banks, including UBS and Credit Suisse, taking painful decisions to pull back from business lines that required a large capital commitment in the past six years. According to McKinsey, this is partially because of regulations which have come in to bind banks and prevent them from returning to the alleged ‘gambling’ that led to the financial crisis. Commenting in the report, McKinsey called the industry’s growth numbers “anaemic” before stating that it was undoubtedly “safer, but stuck in neutral.”

GIIPS and the United Kingdom accounted for more than 75 percent of the private investment fall; construction and real estate dominated

Commenting on the findings, Miklos Dietz, a Senior Partner at McKinsey, and co-author of the report, said, “Growth for the banking industry continues to be muted. Industry revenues grew at 2% per year over the last five years, significantly below banking’s historical annual growth of 5 to 6%... Compared to other industries, the return on equity of the banking sector places it squarely in the middle of the pack.”

From an investor’s position, he added, this uncovers a “jarring displacement.” Banking valuations have traded at a discount to nonbanks since the financial crisis, standing at 53% in 2015. Two years later, however, regardless of steady performance by the banking sector, it had only seen minor improvements at 45%. Dietz expanded, this means “the banking sector’s price-to-book ratio was consistently lower than that of every other major sector over the 2012-17 period — trailing even relatively sluggish industries such as utilities, energy, and materials.”

Interestingly, perceptions of the current state of banking seem to be pushing a growing number of young professionals away from the industry. Junior banking professionals are considering shifting to the world’s largest strategy consultancies, with MBB firms including McKinsey being the chief beneficiaries of worries among junior staff. According to a recent report, one junior staffer of a noted Swiss bank summed up the situation by commenting that many are looking around wondering “how screwed they're going to be in a couple of years' time," as they worry about the longevity of their job in an investment bank when costs are being cut.