Even before the COVID-19 pandemic devasted economies around the world, many parts of the global banking industry were already facing significant challenges. Low interest rates, tighter regulation post-2008, and greater competition from shadow banking and digital players meant that in 2019, nearly 60 percent of banks presented returns below the cost of equity. Nine months into this crisis, banks have played a critical role in funnelling government help to their communities, and supporting their customers. However, their financial position continues to be challenged. McKinsey estimates that global banking’s market cap is down about $2.3 trillion. Price/book ratios are lower than in 2008, and are lagging almost all other sectors. Globally, the industry is trading at a 55 percent discount to the broader market, with 77 percent of banks trading below book value.
So what happens next? Vaccines and therapeutics are in the offing, and may relieve some of the pressure on economies. But even with those welcome developments, should they happen, most banks will face a long winter. Capital losses will mount during 2021. In subsequent years revenues will suffer from lower demand, and margins will come under further pressure from zero or negative interest rates. Two pieces of good news brighten the outlook. For one, in McKinsey’s estimate, the industry appears to have sufficient capital to weather the losses to come in retail and corporate lending. For another, banks have a range of tools at their disposal that can assure the survival of all but the most challenged institutions.
But banks can aspire to thrive – not just survive. They will need to do much more, including a full capital rebuild to fortify themselves for the next crisis, and bold moves to capitalize on the trends unleashed by COVID-19. The industry’s recovery– and its ability to restore local economies to a semblance of normality - largely depends on resilience, determination, and the boldness of its leaders.
As we near the end of 2020, what will be the implications in the short and long-term for banking and capital markets? How will banking models evolve? What will be the implications for the industry’s capital buffers and what should be the priorities of a banking CEO’s agenda post-crisis? Ultimately how can the banking sector successfully emerge and prove its resilience from a challenging 2020?