Global Banking Industry’s Decade-High Profits

A recent assessment by consulting giant McKinsey reveals that banks worldwide are collectively celebrating their most substantial profits in a decade.

Interest Rate Surge Fuels Profit Expansion

McKinsey attributes this remarkable uptick in banking profitability to the significant increase in interest rates across various advanced economies, notably a 500-basis-point rise in the United States. This surge in interest rates has facilitated the long-awaited expansion of net interest margins, resulting in an impressive boost of approximately $280 billion to the sector’s profits in 2022. This, in turn, has elevated the return on equity (ROE) to 12% in 2022, with an expected rise to 13% in 2023.

Impact on Global Banking Profit

In concrete figures, McKinsey reports that the net income of the banking industry leaped from $1 trillion in 2021 to $1.3 trillion in 2022, with a projected $1.4 trillion for 2023.

Deposit Outflows Amidst Profit Surge

Interestingly, these surging profits come amidst months of deposit outflows from major US banks. In the third quarter of this year, $84.5 billion exited JPMorgan Chase, Wells Fargo, and Citigroup, while Bank of America, Morgan Stanley, and BNY Mellon experienced deposit outflows of $44.35 billion.

Four Global Trends Shaping the Future of Banking

McKinsey anticipates that the future of financial institutions will be significantly influenced by four prevailing global trends:

1. Higher Interest Rates and Persistent Inflation: A substantial shift in the macroeconomic environment is underway, marked by higher interest rates and inflation in many regions, coupled with the possibility of a deceleration in Chinese economic growth.

2. Technological Progress: Rapid technological advancements, particularly the rise of generative AI, are transforming customer expectations and experiences. This technological progress is predicted to boost productivity by 3 to 5%, potentially reducing operating expenditures by $200 billion to $300 billion.

3. Governmental Regulatory Scrutiny: Governments are intensifying their regulatory oversight of nontraditional financial institutions and intermediaries. Regulatory measures are expanding to address the evolving economic system, new technologies, emerging risks, and various market players.

4. Shifting Systemic Risks: The nature of systemic risk is evolving due to increasing geopolitical tensions, which introduce greater volatility and stimulate constraints on trade and investment in the real economy.

This assessment by McKinsey underlines the remarkable turnaround in banking profitability and the evolving landscape that financial institutions are navigating in an era of global economic shifts and technological advancements.