KUALA LUMPUR: The global banking sector could see US$1.5 trillion to US$4.7 trillion in cumulative revenue loss due to the Covid-19 crisis between 2020 and 2024, said McKinsey & Co.
In its Global Banking Annual Review 2020, McKinsey said the Covid-19 pandemic would present a two-stage problem for banks in the months and years to come.
The first challenge will be in the form of severe credit losses, likely through late 2021, where almost all banks and banking systems are expected to survive.
Subsequently, banks will face a profound challenge to ongoing operations that may persist beyond 2024, amid a muted global recovery.
McKinsey said depending on scenarios, about US$1.5 trillion to US$4.7 trillion in cumulative revenue could be lost between 2020 and 2024.
In McKinsey's base-case scenario, US$3.7 trillion of revenue will be foregone, the equivalent of more than a half year of industry revenues that will never come back.
It said in that same scenario, return on equity would continue its decline, from 8.9 per cent in 2019 to 4.9 per cent in 2020 to 1.5 per cent in 2021.
At the trough in 2021, return on equity (ROE) would fall to -1.1 per cent in North America, -1.8 per cent in Europe, and −0.2 per cent in developed Asia.
McKinsey partner and report author Marie-Claude Nadeau said banks would need to act quickly to return to pre-crisis ROE levels, in a far more challenging environment than the decade just past.
"The period of zero per cent interest rates is being prolonged by the economic crisis and will reduce net interest margins, pushing incumbents to rethink their risk-intermediation-based business models.
"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," she said in a statement.
McKinsey said for the long term, banks need to reset their agenda in ways that few expected nine months ago.
The firm has set out three imperatives that will position banks well against the trends now taking shape.
"They must embed newfound speed and agility, identifying what worked well in their response to the crisis and finding ways to preserve those practices.
"They must fundamentally reinvent their business model to sustain a long winter of zero per cent interest rates and economic challenges, while also adopting the best new ideas from digital challengers.
"And they must bring their broader purpose to the fore, especially environmental, social, and governance issues, and collaborate with the communities they serve to recast their contract with society," it said.
