One quarter of the world’s bank profits could evaporate in the next three years. Digitalisation, a weak global economy and regulation will put those global bank profits under serious stress, according to a report from McKinsey & Company.

Called A brave new world for global banking: McKinsey global banking annual review 2016, the report reveals that banks in developed markets will most feel the heat. The authors claim as much as $US90 billion in profits — representing 25 per cent of the pie — is at risk.

Despite this, banks in the world’s most developed market — the USA — are best equipped to weather any storm.

The tone of the report is clear: there will be blood. The extent of the bloodbath depends in large part on the degree of digital disruption, and how banks cope with their digital transformation programs.

According to McKinsey consultants Denis Bugrov, Miklos Dietz, and Thomas Poppensieker, “Japanese and US banks have between $1 billion and $45 billion in profits at risk by 2020, depending on the extent of digital disruption. Yet after mitigation, their profitability would drop by only one percentage point to 8 per cent for US banks and 5 per cent in Japan.”

They further note that European and UK industry have almost a third (or $US35 billion) of bank profits at risk. “More severe digital disruption could further cut their profits from $110 billion today to $50 billion in 2020, and slice returns on equity (ROEs) in half to 1 to 2 per cent by 2020, even after some mitigation efforts (see exhibit for how digitisation may reduce fees and margins across different businesses).”

Stop smiling

If, like most consumers. you are sick of bank fees eating into your account balance, it’s time for a little schadenfreude as the day of reckoning is coming. Banks that rely heavily on fees for their profits will take the hardest hits.

In the developing world the risk is different, with banks more susceptible to the credit cycle despite being structurally more profitable. For instance, the management consultants say that banks in Russia, Brazil and China have $US50 billion at risk — the overwhelming majority ($US47 billion) in China. And for those of you who like your doomsday scenarios with extra grimness, the authors say “A slower growth scenario could result in additional credit losses of up to $250 billion, of which $220 billion would be in China, our report finds, but with their current high profitability of $320 billion, Chinese banks should be able to withstand these losses.”

Digital disruption

The pressures from digital disruption are increasing, according to the study.

The authors identify three major impacts:

  • Regulators, who were initially more conservative about the entry of nonbanks into financial services, are now gradually opening up;
  • A number of banks are teaming up with fintech and digital firms, using big data and analytics to sharpen risk assessment and drive revenue growth;
  • Many banks have been able to digitise processes and dramatically lower costs in their middle and back offices (although digitisation can sometimes add costs).

“Some emerging-market banks are managing well, offering innovative mobile services to customers. But our report finds that in the largest emerging markets — China and India— banks are losing ground to digital-commerce firms that have moved rapidly into banking,” say the consultants.

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