Attaining Escape Velocity: Global Banking Annual Review 2024
Executive Summary
The past two years have been exceptionally positive for the banking sector, with record profits and healthy capital and liquidity levels. Despite this, the market remains skeptical about long-term value creation, valuing banking at the lowest price-to-book ratio of all industries. Several factors contribute to this skepticism:
- Mixed Labor Productivity Growth: Banks allocate the highest proportion of revenues on technology but have seen mixed productivity gains.
- Ongoing Regulatory Pressures: Continuous regulatory changes require significant investments.
- Intense Competition: More profitable segments face competition from specialized players.
- Relying on Rising Interest Rates: Recent performance is largely due to higher interest rates.
Key Data Points
- Revenue and Profit: In 2023, global banks generated $7 trillion in revenue and $1.1 trillion in net income, with return on tangible equity (ROTE) at 11.7%.
- Capital and Liquidity: Common equity tier one capital as a ratio of risk-weighted assets reached 12.8%, and total loans as a ratio of deposits was 77.2%.
- Industry Performance: Banking generated more total profit than any other sector globally.
- Valuation Challenge: The industry is valued at a price-to-book ratio of 0.9, indicating expectations of future erosion in economic value.
Winners and How They Achieved Success
Analyzing banks that outperformed over the past five to ten years reveals several key strategies:
- Selective Segmentation: Carefully choosing target segments.
- Finding Scale: Identifying areas where scale can add value.
- Strategic Location: Geographical or value-chain positioning.
- Operational Execution: Rigorous execution across various capabilities like analytics, marketing, and technology.
Key Findings
- Execution vs. Structure: Execution had twice the impact on performance compared to structure, but both were crucial.
- Improvement Potential: About 10% of the industry improved significantly, while two-thirds remained stagnant.
- Management Quotient: To recover its multiple, the industry needs to match the dynamism of these top performers.
Conclusion
While the banking sector has seen strong performance in recent years, the challenge lies in sustaining this momentum and overcoming market skepticism. Banks must focus on strategic execution and innovation to achieve "escape velocity" and recover their market value.
Note: The provided content focuses on the past performance and challenges faced by the banking industry, highlighting the need for strategic execution and innovation to sustain future success.
