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Rising rates boost global banks’ profits by $280 billion in 2022, says McKinsey

Banks enjoy best performance since 2008 crisis

According to a report by McKinsey & Co., banks globally reaped a $280 billion profit boost in 2022 thanks to rising rates, in the sector’s best performance since the 2008 global financial crisis. The report, titled “Global Banking Annual Review 2023”, said that the return on equity (ROE) for banks jumped to 12% in 2022 from an average of 9% since 2010.

The report attributed the profit surge to a series of interest rate hikes by central banks across the world, which provided the biggest tailwind for the industry in over a decade. This prompted several lenders to announce billions of dollars in share buybacks and dividends, as well as invest in digital transformation and innovation.

However, McKinsey also struck a cautious note in its report, saying that “a return to ultralow spreads seems unlikely in the short term, but the outlook for net margins remains uncertain”. The report warned that banks face an increase in competition from non-traditional institutions that are less regulated than lenders, such as fintechs, big techs, and asset managers.

Rising rates boost global banks’ profits by $280 billion in 2022, says McKinsey

Non-bank players capture more market share

The report said that more than 70% of the net increase in funds was held by insurance and pension funds, sovereign wealth funds, private capital and alternative investments rather than banks between 2015 and 2022. These non-bank players offer more attractive returns, lower fees, and better customer experience than traditional banks.

“While the growth of assets under management outside of banks’ balance sheets is not new, our analysis suggests that the traditional core of the banking sector — the balance sheet — now finds itself at a tipping point,” the report said.

The report also said that governments are broadening their scrutiny of non-traditional financial institutions as the macroeconomic system comes under stress. The report cited examples such as China’s crackdown on Ant Group and other fintechs, India’s ban on cryptocurrency transactions, and Europe’s proposed regulation on digital platforms.

Regional divergence in performance

The report also highlighted the regional divergence in performance among banks. It said that banks in the region around the Indian Ocean, which includes India, Southeast Asia, Africa, and the Middle East, are home to half of the best performing banks. These banks have benefited from strong economic growth, low penetration of banking services, and high digital adoption.

On the other hand, banks in Europe and the US as well as China and Russia have struggled to generate their cost of capital. These banks face challenges such as low or negative interest rates, high regulatory costs, legacy issues, and intense competition.

The report suggested that banks need to adopt different strategies depending on their regional context. For example, banks in mature markets need to focus on efficiency and innovation, while banks in emerging markets need to expand their reach and scale.

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