Return on equity (RoE) dropped as low as 4 percent across the industry in 2008 after the financial crisis and remains below the average cost of capital, estimated at 10-12 percent.
November 8th ,2013 : One fifth of the world’s biggest banks may be broken up or sold as part of a “radical course correction” in order to maximize share holder returns, according to McKinsey & Co. About a fifth of the world’s top 500 banks are at risk of becoming a takeover target, due to their underperformance and inability to adapt to market conditions in the wake of the financial crisis. In its closely followed annual report, the firm’s consultants said only 10 banks were capable of transition from the “also-rans” to join an emerging group of 90 global financial leaders. McKinsey which is an adviser to many of the largest financial institutions advocates a back to basic strategy to avoid the traps that could see an array of large banks consigned to the history books. Even top banks will be forced to rethink their strategy and forced to divest business to succeed. McKinsey warned that businesses that have grown big due to a strong global growth may have to think about asset sales in future to remain ahead of the pack. Higher capital requirements, slow economic growth, increasing demands by national regulators – have reduced international capital flows and put pressure on banks’ performance – says the report. New rules such as the supplementary leverage ratio and the emergence of online competitors are also threats, McKinsey said.
Return on equity (RoE) dropped as low as 4 percent across the industry in 2008 after the financial crisis and remains below the average cost of capital, estimated at 10-12 percent. In the boom years leading up to 2006 many banks’ RoE topped 20 percent.
“Banks that get caught in these traps are more likely to be among the 20pc of institutions worldwide that, in our estimate, may become acquisition targets in the next several years,” the report said.
Consultants from McKinsey have been hired by top notch banks since the financial crisis to advise on the strategy. Royal Bank of Scotland (RBS) hired the firm two years ago to help come up with a strategy to reduce its dependency on its investment banking arm. Several former McKinsey consultants have also worked in senior roles in the banking industry, including Peter Sands, chief executive of Standard Chartered and Lord Green, former chairman and chief executive of HSBC.
McKinsey has also emphasized the importance of embracing technology, in particular enabling customers to access banking services remotely.