Most Banks Shaky, May Fail- Report

Indication has emerged that majority of the banks in Nigeria and indeed the world over  “are not in great shape” or economically viable to withstand imminent downturn about to occur.

According to a report from consultancy McKinsey & Co, in its annual review of the industry released on Monday, it asserted that more than half of the world’s banks are already in a weak position because their returns on equity aren’t keeping pace with costs.

Ahead of a potential economic slowdown, McKinsey urged that firms take steps such as developing technology, farming out operations and bulking up through mergers.

“We believe we’re in the late economic cycle and banks need to make bold moves now because they are not in great shape,” Kausik Rajgopal, a senior partner at McKinsey, was quoted to had said in an interview. “In the late cycle, nobody can afford to rest on their laurels.”

Reporting the findings, Bloomberg stated that the decade since the global financial crisis has seen a wave of innovation in financial services, bringing new competitors from fintech startups to giants like Apple Inc. and Alphabet Inc.’s Google.

Banks have pondered whether to compete with, partner with or acquire some of these newcomers. Some established firms have sought to rebrand as technology companies, in part to attract hard-to-get talent.

McKinsey, whose clients are some of the biggest corporations in the world, consults on topics ranging from strategy and technology to mergers and acquisitions, outsourcing and stock offerings.

In its report, the firm said banks risk “becoming footnotes to history” as new entrants change consumer behavior. Most recent attempts by banks to boost efficiency have been “business-as-usual,” it said.

Banks allocate just 35 per cent of their information-technology budgets to innovation, while fintechs spend more than 70 per cent, McKinsey said. Combined with regulatory factors lowering the barrier to entry — like open banking and looser requirements for startups — the environment is increasingly conducive for newer firms to take share from banks.

The report points to Amazon.com Inc. in the U.S. and Ping An in China as examples of technology firms that are capturing financial-services customers. To make matters worse for the old guard, the new players tend to go after the business areas that create the highest returns at banks — credit cards, for example.

Investors have taken notice. Globally, banks’ valuations have fallen 15 per cent to 20 per cent since the start of last year, McKinsey said, adding that “the drop in valuation suggests that investors anticipate a sharp deceleration in earnings growth.”

Lenders can cut costs and find funds for technology by outsourcing what McKinsey calls “non-differentiating activities,” including some trading and compliance functions. Banks “need to get much more comfortable with external partnerships and being able to leverage talent externally,” Rajgopal said.

“Going forward, scale will likely matter even more as banks head into an arms race on technology,” the report says.