Jakarta. The global banking industry has settled into an unsettling new reality of stagnating growth and low profits, risking contagion to Southeast Asian lenders, the sixth annual report on banking industry consultancy firm McKinsey revealed on Wednesday (07/12).
While Southeast Asian banks and peers in emerging markets are spared from from low interest rates which pins down peers in developed market, sluggish global economic growth is instead taking its toll the banks though international trade channel. The Southeast Asian debtors would likely to see lower lever of exports, causing defaults in households and companies, unemployment, lowering consumption which, in turn, increasing banks' risk costs.
Southeast Asian banks are seeing dropping return on equity (ROE) to 2 percent or 3 percent from today's 12 percent in worst scenario and to 5 percent to 9 percent after mitigation in the coming years with profits may drop by $6 billion to $7 billion by 2020. ROE measures a company's profitability by comparing net income to average stakeholder's equity.
The rising credit risk may put 1 percent to 7 percent of revenue at risk in Southeast Asia by 2020.
Still, hey are fared better compared to peers in Continental Europe and the United Kingdom that may see profits dropping to $77 billion in 2020 from today's $110 billion. McKinsey said banks in the Eurozone and the United Kingdom faced the greatest threat from slow economic growth in which low-interest rates once designed to propel the economy are choking the banks' net interest income.
To make things worse, these conventional banks are losing customers to better-equipped competitors or even financial technology firms.
If interest rates stay as low as today and digital attack disrupts the industry then another $60 billion may be at risk while return on equity (ROE) in the Continent and the UK both will fall by one percent to 3 percent and 2 percent consecutively.
"Global banking is delicately perched between profit and loss, and the next move seems likely to be downward with the main questions being around timing and how quickly the industry can adjust," McKinsey wrote.
The report – titled "A Brave New World for Global Banking" – provides a wake-up call that the industry has long left since the financial crisis in 2008.
ROE at global banking industries stayed around 9.6 percent in 2015, roughly returning the cost of capital and just a slight increase from 9.5 percent in the previous year. The report noted that global ROEs have gone "sideways" for six consecutive years since 7.9 percent in 2011.
"To counter the headwinds now gathering force, most banks will need to embark on a fundamental transformation that exceeds previous efforts," McKinsey wrote.
Most banks will need to "undergo an unprecedented transformation" instead of "tinkering around the edges" of existing business model to address the piling hurdles, the consulting firm said.
The first step for banks' executives is to prioritize its surviving ability by protecting revenue, cutting unnecessary costs and improving the health of balance sheets. At this point, using digitization as a cost-cutting alternative is just a beginning and has been done by many banks in the developed market.