Financial Services Practice
Breakaway: How Leading Banks
Outperform Through Differentiation
McKinsey Global Banking
Annual Review 2013
Breakaway: How Leading Banks
Outperform Through Differentiation
McKinsey Global Banking
Annual Review 2013
Contents
Executive Summary
2
The “Triple Transformation”
Imperative Is Intensifying
6
The Industry’s Transformation:
Early Progress, More to Do
18
Leaders’ Breakaway Strategies
27
Developing a Strategy for
Outperformance: Steps for Banks
And a Path for the Industry
40
2
Breakaway: How Leading Banks Outperform Through Differentiation
Executive Summary
New research from McKinsey finds that the global banking
industry shows some signs of progress in its quest to
return to sustained health and profitability. The industry
has improved its capital position; it raised its tier-one
capital ratio to 12.0 percent in 2012, up from 11.4 percent
in 2011 and 8.4 percent in 2007. Many banks successfully
cut costs in the past year, though for the industry as a
whole, costs have remained essentially flat. Loan-loss
provisions have returned to historical levels in many
developed markets. Banks (and governments) have wound
down a good portion of the assets they had assigned to
“bad banks.”
Breakaway: How Leading Banks Outperform Through Differentiation
However, these steps have not been
able, value-creating strategies: distinctive
enough to lift returns. True, industry re-
customer franchise, back-to- basics bank-
turn on equity (ROE) rose—from 7.9 per-
ing, balance-sheet-light investment special-
cent in 2011 to 8.6 percent in 2012. But
ist, growth-market leader, and global
1.6 percentage points of that gain were
at-scale universal. The unity and clarity of
driven by one-time changes in goodwill
these banks' strategy, and the discipline of
and improvements in impaired assets.
their execution, have been recognized by
Year-on-year, in fact, banks’ operational
the markets – the three essential ingredi-
performance deteriorated.
ents for outperformance. Remarkably, many
Why? Banks are contending with a range
of forces. The global macroeconomy has
some bright spots, but growth remains
of these banks are not from emerging markets but are thriving in highly competitive,
low-growth regions.
muted. Financial globalization has slowed
Their success is reflected in their financial
and may even be regressing: capital flows
performance. These outperforming banks
and trade are in retreat, new taxes are
have an ROE of 15 percent (versus 7 per-
under discussion, and other regulations
cent for the other 410), higher margins,
are denting banks’ results. Intense com-
and faster revenue growth. They enjoy a
petition and waves of digital upstarts are
price/book ratio of 2.0, again far superior
also contributing to what is, all things con-
to the other banks’ 1.0. Differentiation is
sidered, a fairly cheerless operating envi-
the name of the game.
ronment. Banks are also responsible;
many have not yet made the hard choices
needed to turn around performance.
Some other banks have strong strategies
and disciplined execution, but markets
have not yet noticed. They should stay the
course. But many other banks, whose
strategies may have gotten muddled in an
Many banks will be attracted
to the distinctive customer
franchise strategy, but most of
them are unsuited for it and
underestimate the challenges.
attempt to be all things to all investors,
need to change direction. They should first
review how the five strategies create value,
then choose one that fits well with the
bank’s capabilities and markets. Today’s
high-performing banks have the advantage
for now but must take steps to consolidate
their gains. Other banks whose value creation stems largely from location in high-
Yet despite the headwinds, our research
growth markets may need to reconsider
has identified a number of banks that are
their strategy; several of these markets are
outperforming. Of the 500 biggest banks in
now slowing. For those banks that are cur-
the world, 90 have defined—and are suc-
rently not creating value, the choice is
cessfully executing—one of five distinguish-
somewhat starker. Some are already on
3
4
Breakaway: How Leading Banks Outperform Through Differentiation
the right path to deliver the combination of
formance. Many customers and
strategy, execution, and financial results
shareholders crave simplicity. Banks
needed to win recognition from investors.
that adopt this approach need to es-
Many others, whose strategies may have
tablish and maintain cost leadership
gotten muddled in an attempt to be all
and strong risk-management discipline
things to all stakeholders, need a more
as we head into an even slower growth
radical course correction.
environment.
Our analysis suggests a number of striking themes that are likely to emerge in the
next several years:
■ Balance-sheet-light strategies are
gaining favor in the context of new
rules, such as the leverage ratio.
Both securities services specialists and
wealth/investment banking firms are re-
Many of today’s winning
growth-market leaders will need a
new strategy as markets mature
and growth slows.
vamping their propositions – with clientcentric solutions, agile technology, and
risk distribution at the heart of the offer.
■ Many of today’s winning growthmarket leaders will need a new
strategy as markets mature and
■ Many banks will be attracted to the
distinctive customer franchise
growth slows. A fortunate few are
situated in buoyant markets that will
likely defy the broader macroeco-
strategy, but most of them are un-
nomic slowdown, and they will find
suited for it and underestimate the
continued success with this strategy.
challenges. Success in this strategy
Others should be on the lookout for a
requires innovation in digital banking,
different approach.
data analytics, and multichannel sales
and service, enough to earn premium
■ Several banks are attempting the
economics from satisfied, loyal cus-
global at-scale universal strategy,
tomers. Investing in these capabilities
but a mere half-dozen are suc-
is a high-risk, high-reward bet. Banks
ceeding with it. Success in this strat-
that accept this challenge must be dis-
egy depends on exceptional risk
ciplined when it comes to cost and risk
management and a mastery of the
management; if not, they might get
challenges of managing massive com-
stuck in the middle, with higher cost
plexity. The odds are long against sus-
structures than the basic banks and
tained success; a few of the global
lower revenues than the distinctive-
universals will need to retrench, and
customer-franchise banks.
some may decide to break up.
■ A back-to-basics approach is likely
to be the best strategy for most
banks to return to sustainable per-
■ The rise of industry utilities may
have significant influence on
banks’ choice of strategy. A growing
5
Breakaway: How Leading Banks Outperform Through Differentiation
number of activities, including some
20 percent of the largest 500 global
core banking functions, might be better
banks may be broken up or acquired by
placed with new companies that spe-
better performing rivals.
cialize in them. The rise of new utilities
might help more banks successfully
adopt the back-to-basics approach.
■
■
■
This report consists of four chapters. In
To execute the chosen strategy, banks
the first, we discuss the industry’s financial
will need to draw on the levers relevant to
performance in 2012 and the forces that
their strategy, a process we outlined in
are keeping it in check. In the second, we
the 2012 edition of this report, The Triple
review banks’ substantial progress on the
Transformation. That report proposed a
agenda suggested in The Triple Transfor-
three-pronged transformation of banks’
mation, and the work still to do.
economics, business models, and culture. If banks execute those transforma-
The third chapter explains our new research
tions in sufficient numbers, and embrace
on the 90 outperforming banks and the five
differentiation in strategy, we see a couple
strategies that are powering their results
of important results. First, the industry
(page 27). The report concludes with a re-
could return to sustainable economics,
view of the steps that today's outperform-
with ROE of 12 percent or more, once
ers can take to stay on top, and the more
again in excess of the cost of equity. But
difficult agenda facing other banks that
second, in the process of this shift, up to
want to breakaway from the pack.
6
Breakaway: How Leading Banks Outperform Through Differentiation
The “Triple Transformation”
Imperative Is Intensifying
In some respects, the global banking industry’s 1
performance improved in 2012. But it is still falling short
of the expectations of investors and other stakeholders.
The operating environment is doing the industry no
favors, with uncertain economic and regulatory
conditions and competitive intensity increasing in many
markets. In this context, the “triple transformation”—the
slate of economic, business-model, and cultural changes
we recommended in the 2012 edition of this report—is
1
In this report, “the banking
industry” includes deposit-taking
and lending institutions and other
banks whose business is
concentrated in investment
management, servicing, and
processing. It does not include
pure asset or wealth managers, or
insurance companies.
more important than ever.
7
Breakaway: How Leading Banks Outperform Through Differentiation
Exhibit 1
Before one-time
adjustments,
ROE improved in
2012, driven by
North America
and the “GIIPS”1
countries
Total global ROE2, 2000 – 2012E
Percent
ROE by region
Percent
ROE 2012
20
∆ ROE
(2011-2012)
Emerging markets
17.3
16.3
15
17.7
16.8
Emerging
markets
13.6
12.7
Latin America
16
-3.0
China
19
-0.5
Other Emerging
10
North America
5.6
5
3.5
Developed
world
‘07 ‘08
1
Greece, Ireland, Italy, Portugal, Spain
2
Based on a sample of ~1,500 quoted banks with eligible data
8
Western Europe
2
GIIPS & Cyprus
-4
+0.6
-2.0
4.7
0.6
0
2000
-0.3
Developed world
8.6
Global
7.9
14
+13.3
Other Developed
9
Global
9
+0.2
‘11 ‘12
+0.7
Source: Thomson Reuters; McKinsey Global Banking Pools
Clear progress, but value creation
remains some way off
points below nominal GDP growth. In the
At first glance, the banking industry ap-
enues had tracked or modestly exceeded
peared to gain momentum in 2012. Re-
growth in the broader economy; 2008
turn on equity (ROE) was 8.6 percent, up
also saw the industry P/B fall to 0.9.
2
2
3
In this report, price/book ratio
and return on equity (ROE) do
not include intangible assets,
unless otherwise specified. See the
appendix for definition of terms
and more on the databases used in
this report.
The analysis also showed a slight
composite effect from 2011 to
2012; if the effect is taken into
account, ROE performance would
be slightly worse.
30 years or so before 2007, banking rev-
from 7.9 percent in 2011 (Exhibit 1). The
However, the relative strength in 2012 in-
industry’s price/book (P/B) ratio improved,
dustry ROE is deceptive (Exhibit 3, page
from 1.02 in 2011 to 1.15 in 2012. Rev-
8). Several one-off items—including
enue growth was stable, at 4.3 percent
lower rates of impairment in goodwill and
versus 4.4 percent in the prior year.
other assets, especially holdings of
At face value, then, 2012 represents an-
Greek government bonds—are responsi-
other step on the long slog up from the
ble for 1.6 percentage points of the im-
depths of the crisis, when ROE bottomed
provement. 3 Ignoring the one-off effects,
out at 4 percent (Exhibit 2, page 8). In
global-banking-industry ROE actually fell
2008, industry revenues fell radically; be-
from 7.9 percent in 2011 to 7 percent in
tween 2007 and 2008, revenues con-
2012. Rising costs and reduced leverage
tracted by 2 percent—11 percentage
cut into returns.
8
Breakaway: How Leading Banks Outperform Through Differentiation
Exhibit 2
Though
improving,
banking industry
performance is
not yet
sustainable
Global banking industry performance, 2000-2012
Percent
ROE 22
Profitable, but
under-delivering
20
Sustainable
18
16
2000-2005
14
COE
(11-12%)
2020?
12
10
2012
8
6
4
2008
2
Unsustainable
growth
Crisis
0
-12
-11
1
-2
-1
0
Revenue growth - nominal GDP growth
2
3
4
Source: McKinsey Global Banking Pools
Exhibit 3
Without some
one-off
improvements,
industry ROE
declined from
2011 to 2012
Global banking ROE change,1 2011-2012
Percent
7.9
2011 ROE
Margin
0.3
Cost
-0.7
Leverage
Loan loss
provisions
-0.7
0.2
One-offs2
2012 ROE
1.6
8.6
1
ROE impact from stepwise disaggregation of the 2011-2012 change in ROEs; e.g., margin effect is calculated as the difference between 2011 ROE and a theoretical ROE that is
calculated with 2012 margin, but 2011 cost, leverage, LLP, one-offs. “Mix effect” is included.
2
Unusual expenses (change in impairment of goodwill, securities, etc.), tax and other. Includes decrease in goodwill impairment from $58B in 2011 to $26B in 2012, Greek
government bond write-off decline from $53B to $4B, and other impairments and write-off changes from $25B in 2011 to $57B in 2012. Net change is a decrease in one-off
expenses from $135B in 2011 to $87B in 2012.
Source: Thomson Reuters; SNL; McKinsey Global Banking Pools
9
Breakaway: How Leading Banks Outperform Through Differentiation
Exhibit 4
Proportion of
banks with P/B
ratio of less than
1 is still high in
developed
markets
Average bank price-to-book value1
Basis points
4.0x
P/B multiples
Banks with P/B less than 1
Percent
Emerging markets
3.8
Latin America
China
3.0x
35
23
Other Emerging
1.7x
1.2x
42
1.6x
2.4
2.0
2.0x
1.6
1.6
Emerging
markets
1.5
1.0
1.0x
1.4
1.4
Developed world
North America
0.9 1.0
Developed
0.7
world
1.2x
43
Western Europe
GIIPS & Cyprus
Other Developed
59
70
66
0.9x
0.7x
1.0x
0x
2000 01 02 03 04 05 06 07 08 09 10 11 12 13 2
1
Based on a sample of ~1,500 quoted banks with eligible data
2
Estimated based on 2013 H1
Source: Thomson Reuters; McKinsey Global Banking Pools
To be sure, some parts of the world did
crisis, 2012 still does not compare well.
better than others. ROEs in Latin America,
Over the cycle, from 2006 to 2011, return
China, and some other emerging markets
on equity was 9.2 percent; industry rev-
are still in the mid- to high teens (though
enues grew at the same rate as GDP; and
in 2013, margin pressure may be pushing
the industry P/B was 1.66.
these lower). North America posted a
And value continues to leak slowly away.
small increase from 2011, to 7.9 percent.
Analysts estimate banks’ cost of equity
But returns in Western Europe were ane-
(COE) in various ways; the consensus of
mic, at 2 percent.
their estimates is about 11 or 12 percent,
For the industry in aggregate, it turns out
depending on the region. ROE less COE
that 2012 was actually a step sideways,
and, some share-price gains notwithstanding, another frustrating year for
stakeholders. The global banking industry
shows a performance gap for the global industry of three or four percentage points.
Furthermore, the industry is growing a bit
slower than the broader economy.
is not yet delivering the returns and
Investors are aware that banking’s road
growth that it consistently achieved before
ahead is uphill: in every region, a fair pro-
the crisis. Even if we consider perform-
portion of banks operate today with a P/B
ance over a longer period, including the
ratio of less than 1 (Exhibit 4). They are
10
Breakaway: How Leading Banks Outperform Through Differentiation
also nervous about how further capital in-
Continued pressures
fusions and sales of government-owned
In 2013, external shocks (such as the
positions will affect valuations. In mid-2012
Cyprus banking crisis, the devaluation of
McKinsey estimated that the banking in-
the yen, the announcement by the Federal
dustry in Europe needed an additional €1.3
Reserve that it might begin to “taper” its
trillion by 2021 to meet Basel III capital re-
bond-purchase programs, and the result-
quirements.4 While banks have raised
ing drop in some emerging-market curren-
some capital since then—over €200 billion
cies) popped up with regularity. But the
between December 2011 and June 2012,
global financial system seems to have
according to the European Banking Au-
taken these in stride. The VIX index has
thority—there is still a long way to go, in-
never again approached the high it
cluding sums needed to buy back
reached in October 2008. Even events
state-owned positions in banks.
5
such as the S&P downgrade of US debt
and civil war in Syria caused the index to
flare only slightly. Over time, financial in-
Reduced volatility does not mean,
however, that the pressures on the
banking industry are any less.
dustry volatility has reverted to its longterm mean of about 15 to 20.
Reduced volatility does not mean, however, that the pressures on the banking
industry are any less. Economic expectations are decidedly sober, as improving
Furthermore, other stakeholders—customers, employees, governments, and
the United States, are offset by slow-
regulators—also expect more. Retail cus-
downs in China and most other emerging
tomers have lost faith in banks and are
economies. Capital controls—a troubling
dissatisfied with low returns on savings
blast from the past—are just one of many
products. Business customers are aware
signs of growing financial nationalism; as
of the high risk premiums they are paying
countries defend their financial borders,
when they can get a loan; some cannot
get credit and are unhappy about it. Governments are anxious to boost economic
4
5
conditions in some countries, especially
banking markets will inevitably suffer. And
the pace of regulatory reform is accelerating again. Some significant rule changes
are now set, but others are more ambigu-
Dina Chumakova, Miklos Dietz,
Tamas Giorgadse, Daniela Gius,
Philipp Härle, and Erik Lüders,
Day of Reckoning for European
Retail Banking, mckinsey.com,
July 2012
growth and want banks to lend more;
“EBA publishes final report on the
recapitalisation of European
banks and paves the way for the
transition to the CRDIV
framework,” European Banking
Authority, eba.europa.eu, October
2012.
All in all, it is clear that the industry is
again
making progress and is recovering from
The prognosis for the global economy is
the crisis. But, as we discuss next, it is
subdued at best. The McKinsey Global
dogged by a poor operating environment.
Institute has long tracked executive sen-
moreover, they are still stinging from the
cost of recent bailouts.
ous, and still more are on the horizon.
The global economy downshifts—
11
Breakaway: How Leading Banks Outperform Through Differentiation
Exhibit 5
Revenue growth
is expected to
slow, barely
exceeding GDP
growth
Industry revenue growth and GDP growth in two scenarios, 2013-2020 CAGR1
Percent
“Golden Age” of banking,
2002-2007
Nominal
after-risk revenue
9.6
Nominal GDP
6.6
Real
after-risk revenue
6.5
Real GDP
1
“Consensus” scenario
2013-2020
3.5
“Slowdown” scenario
2013-2020
7.9
3.9
4.3
6.7
4.3
3.2
1.3
1.8
Using USD, fixed 2012 EOY FX rate
Source: McKinsey Global Banking Pools
timent; in its most recent survey (June
2013), some corporate leaders began to
dissipation of sovereign risk in the Euro-
retreat from their earlier view that emerg-
pean Union and little progress on the
ing markets would lead the global econ-
structural challenges that have threatened
omy over the next several years. 6
it recently; a protracted process of finan-
Support is shifting to the notion that in-
cial regulatory reform in the United States;
stead, developed economies would take
a continued high degree of state control in
the lead—which would mean slower
China; and high inflation and volatile com-
growth overall. More executives also
modity and real-estate prices in other
foresaw the possibility of a “lost decade”
emerging markets.
for the global economy.
6 “McKinsey Global Survey results:
Economic conditions snapshot,”
mckinsey.com, June 2013; 2,275
executives responded in this
edition of the bimonthly survey.
held back by a range of factors: the slow
In the second and more somber scenario,
What does this mean for banking? We de-
real global GDP growth slows to a crawl:
veloped two scenarios to anticipate the ef-
1.6 percent annually through 2020. This
fects of a slow economy on the industry’s
scenario does not foresee any major eco-
revenues (Exhibit 5). The first scenario rep-
nomic crises but instead a deep recession
resents a consensus view; in most re-
in both developed and emerging markets.
spects, it agrees with base-case scenarios
In this version of events, Europe will be
developed by the International Monetary
unable to solve its problems, and the
Fund, the Economist Intelligence Unit, and
United States will struggle with both its
IHS Global Insight. In it, real global GDP
growing debt load and new tax hikes that
grows at 3.5 percent through 2020 and is
damage competitiveness. In China, the
12
Breakaway: How Leading Banks Outperform Through Differentiation
scenario foresees shifting from an invest-
their 2007 peak. Across advanced
ment- to a consumption-based economy,
economies, cross-border lending has de-
and in other emerging markets it calcu-
clined sharply as banks have retrenched
lates that slowing capital and trade flows
to their home markets. In particular, finan-
will take a big bite out of growth.
cial integration in Europe has reversed:
In this report, we use the first scenario as
our base case. In it, nominal revenues
since 2007, eurozone banks have reduced
cross-border assets by $3.7 trillion.7
after risk costs for the global industry
In part, this reflects a healthy correction
would grow at 7.9 percent annually
after a rapid expansion in global credit mar-
through 2020, a touch ahead of nominal
kets. Taken too far, however, the resulting
GDP growth of 6.7 percent. The use of
balkanization of financial markets could hin-
this scenario is supported by develop-
der legitimate borrowers’ access to financ-
ments in the first half of 2013. For exam-
ing. And this, in turn, is directly correlated to
ple, the slight shift in growth back to
the slowdown in global economic growth.
developed markets that this scenario foresees is seen in banks’ 2013 P/B ratios,
which are declining in emerging markets,
and rising slightly in developed markets.
Trade is showing similar signs of retreat. According to the World Trade Organization,
growth in world trade will fall from 5.2 percent in 2011 to 2.5 percent in 2013. Although some disputes were settled in the
Across advanced economies,
cross-border lending has declined
sharply as banks have retrenched
to their home markets.
third quarter of 2013, restrictions on government procurement in some emerging
markets and the spillover effect of unconventional monetary policy in developed
economies are fanning protectionist fears.
Regarding the slowdown, the WTO says
“there are strong indications that protectionism has … played a part and is now taking
7
8
Toos Daruvala, Richard Dobbs,
Ricardo Falcón, Philipp Härle,
Ju-Hon Kwek, and Susan Lund,
Financial Globalization: Reset or
Retreat?, McKinsey Global
Institute, mckinsey.com, March
2013.
“WTO sees gradual recovery in
coming months despite cut in
trade forecasts,” wto.com,
September 19, 2013.
Growing financial nationalism
new forms that are harder to detect.”8
In many ways, the ties that bind the global
Under pressure to boost economic
financial system are fraying. With capital
growth and lacking other effective tools,
flows and trade in retreat, and currency
central banks around the world launched
wars and taxation on the rise, the vital
a number of asset-purchase programs. In
connections of finance are diminishing—
their home countries, quantitative easing,
and banking opportunities with them.
along with other policies, produced a
Consider first financial globalization, where
record low-interest-rate environment that
after two decades of expansion, there has
undoubtedly helped put the developed-
been a marked retreat. Cross-border capi-
world banking system back on its feet.
tal flows have fallen by 60 percent from
But it also caused a flow of “hot money”
Breakaway: How Leading Banks Outperform Through Differentiation
from slow-growth markets to fast-growth
including an automatic exchange of infor-
ones. As currencies rose in these coun-
mation, has accelerated. In the future, it
tries, governments came to fear a loss of
will likely be harder to avoid taxation.
competitiveness and some introduced
capital controls.
A new wave of regulatory uncertainty
Banks in advanced economies are coming to grips with many features of Basel
With currencies volatile and
growth slowing, the stage may be
set for currency “wars.”
II.5, Basel III, and Dodd-Frank. Most
banks in Europe and North America are
prepared for new capital charges for market risk and counterparty credit risk, as
well as the liquidity coverage ratio, a centerpiece of Basel III.
Meanwhile, these unconventional mone-
But considerable uncertainty and challenge
tary policies have introduced another un-
remains in some other aspects of Basel
certainty, as unwinding these policies may
regulation. The minimum leverage ratio
prove difficult. The recent US suggestion
(MLR) is a game changer for some of the
that it might taper future bond-purchase
largest universal banks.9 In 2012 eight of
programs shook investor confidence and
the top ten banks by assets had leverage
led to precipitous sell-offs in both equity
ratios within the proposed guidelines; the
and currency markets as the hot money
other two will likely have to take immediate
flowed out. With currencies volatile and
steps to shrink their balance sheets. But
growth slowing, the stage may be set for
some of the eight may yet need to take ac-
currency “wars.”
tion; big banks based in the United States
Finally, taxation policy is also becoming
more intensely competitive. Advanced
economies have systematically reduced
corporate tax rates for two decades, and
multinational corporations have used differences among tax regimes to lower their
overall tax bill. Meanwhile, a thriving tax-
9
In its simplest form, the minimum
leverage ratio (MLR) is defined as
equity over assets. As such it is the
reciprocal of the more common
metric of financial leverage. A 3
percent minimum MLR effectively
sets a leverage cap of 33x.
would be subject to a new rule proposed
by the Federal Reserve, which calls for a 5
percent MLR (that is, a leverage ratio of
20:1), and a 6 percent MLR for some subsidiaries (16.67:1). If international regulators follow suit, the deleveraging effect will
naturally be much more extensive.
haven industry has produced some re-
Other Basel rules will also challenge
markable anomalies—for example, a
banks. The net stable funding ratio
substantial share of Russian private
(NSFR), another key precept of Basel III,
wealth became concentrated in Cyprus.
is one. The NSFR is undergoing a review
The tide may be turning, however. Over
and will likely be relaxed. Even then, many
the past 12 months, the G20 agenda to
banks may need to adjust their balance-
reduce tax arbitrage and improve trans-
sheet structure and funding to comply.
parency into private individuals’ banking,
Another is Basel III.5, a fundamental re-
13
14
Breakaway: How Leading Banks Outperform Through Differentiation
view of trading-book practices. These
many, will exacerbate the cross-border
rules will require banks to calibrate book
lending contraction discussed earlier, as
definitions, hedging practices, and mod-
the use of deposits generated in one mar-
els. The rules will likely force some to hold
ket for lending in other markets is becom-
more capital as a result. Banks are strug-
ing more constrained.11 Establishing
gling to prepare for compliance with these
firebreaks between businesses, as several
far-reaching new regulations.
of these new regulations envision, will also
Perhaps the most important regulatory uncertainty, however, relates to the structural
be costly for banks as pools of liquidity
and capital become trapped, and dupli-
regulations under consideration in many
cate structures are erected.
countries. Pending regulations intended to
Finally, national legislatures in several
ensure orderly recovery and resolution—
parts of the world are debating the wis-
including ring fencing of core activities and
dom of a financial-transactions tax. Some
the establishment of national subsidiaries
have dropped the idea. But others have
whose liabilities are match-funded by their
embraced it. Importantly, an EU-wide fi-
own assets—would undoubtedly promote
nancial-transactions tax remains a distinct
banks’ safety and soundness.
possibility, despite some legal challenges.
With industry growth moderate
at best, incumbent banks are
fighting more intensely than ever
for share, even as new business
models establish a foothold in
traditional banking markets.
Intensifying fight for profits and
share
With industry growth moderate at best,
incumbent banks are fighting more intensely than ever for share, even as new
business models establish a foothold in
traditional banking markets.
Incumbents: Hypercompetition and
price cutting
Arguably, competition has lessened
However, these structural regulations
might have serious implications. Ring
fencing could drive up costs for banks—
10
11
Average analyst estimate, as
reported in Leonardo Gambacorta
and Adrian van Rixtel, “Structural
bank regulation initiatives:
approaches and implications,”
Bank for International
Settlements Working Papers,
Number 412, bis.org, April 2013.
Toos Daruvala et al, Retreat or
reset?.
for example, the consensus view is that
changes proposed in the Vickers Report
could impose an estimated £6 billion10 of
additional costs to UK banks, equivalent
to 33 percent of industry pretax profit in
2011. Subsidiarization and the pressure
for matched books, for example in Ger-
somewhat in the complex trading activities most affected by Dodd-Frank and
Basel II.5 and III. Some big institutions
were merged or acquired during the financial crisis, reducing competition in certain
products, at least in the short term. Moreover, many firms that aspired to provide
clients with complex trading services have
withdrawn, as they refocus on their core
capabilities and key customer franchises.
Breakaway: How Leading Banks Outperform Through Differentiation
And anecdotal evidence suggests that
United Kingdom, cash payments for new
those that have remained in these com-
current accounts ranging from €50 to
plex activities have benefited.
€100 have become the industry standard.
Rate wars for time deposits are waging
unabated, with even retail rates narrowing
Transaction products demonstrate
similar competitive intensity. In
corporate cash management, fees
are often waived altogether as
banks fight to capture balances.
to within roughly 15 basis points of the
risk-free rate (this is an average; rates are
lower in some stable markets, and much
higher in some struggling economies).
Transaction products demonstrate similar
competitive intensity. In Asian and European corporate cash management, fees
are often waived altogether as banks fight
to capture balances. In payments, com-
On the other hand, the retreat from com-
petition has long been intense. Payments
plex trading has been matched by a rise
are very often the first banking product
in competition for flow volumes in rates
purchased by both retail and small-busi-
and foreign exchange, for lower-risk as-
ness customers and are considered a
sets, and—outside the United States—for
“stronghold” product, worth pursuing
the “sticky” deposits needed to fund
even if (as is the case in many areas) they
them. On the asset side, the best-rated fi-
are only profitable when subsidized by
nancial institutions on both sides of the
float income on associated balances. As
Atlantic have pushed spreads on low-risk
we discuss next, a throng of new com-
lending to record lows. Rates on no-fee,
petitors is targeting payments, among
low loan-to-value mortgages are now
many other products, ratcheting up the
lower than most banks’ credit-default
competitive intensity.
swaps. Spreads on corporate loans are
well under 50 basis points for high-quality
Western European companies. Meanwhile, the larger Asian banks are winning
trade- and infrastructure-finance deals in
Europe, pushing prices down and undermining the incumbent banking leaders.
12
Attributed to Bill Gates in 1995 in
“A survey of online finance,”
The Economist, May 18, 2000.
Rise of new competitors
Nearly 20 years ago, Bill Gates famously
observed that banking is essential, but
banks are not.12 At the time, he meant
that banks’ troubled IT systems, a longtime weakness, were vulnerable to com-
On the liability side, underfunded Europe
petition from software companies. Today,
has seen intense competition for the retail
his comment looks prescient in another
and commercial deposits that receive the
way: many of banks’ traditional strengths
most favorable treatment from the new
are now under fire from a wide range of
Basel rules on liquidity. Particularly in Ger-
unexpected sources, with some far-reach-
many, the Netherlands, Poland, and the
ing implications.
15
16
Breakaway: How Leading Banks Outperform Through Differentiation
Entrants from other businesses are further
credit-default swaps, and foreign ex-
increasing capacity in an already satu-
change. Platforms have even sprung
rated market. Broadly speaking, retailers
up in staid markets like the one for cor-
have strong access to customers and su-
porate bonds. 13 Dealers’ flows and prof-
perior service skills, and in cases such as
its are at risk, and so too are some
PayPal and Amazon, better analytics and
market operators.
targeting skills. On the other hand, another entrant to retail banking from outside the industry, the postal service, has
mostly struggled to successfully differentiate its retail offerings. In corporate banking, hedge funds and private-equity firms
have entered the market, raising new capital to make sizable loans to corporations
and commercial real-estate developers.
blick in Germany—are redefining customer access, as they become the go-to
source for customers searching for financial products. Banks have historically benefited from an asymmetry of information,
in which customers find it difficult to compare banks’ competing offers. These sites
New digital businesses are shaking things
are changing that, and are already weakening the customer/bank connection.
have propelled traditional banking. First,
Some may have the potential to transform
digital start-ups are creating new ways for
the overall distribution model for retail fi-
customers to access banking services, es-
nancial services.
ture—payment systems, along with
invoicing services and asset-management
services— has long been one of banks’
greatest assets. These new electronic
models are redirecting transaction flows
and even infiltrating and altering retail customer relationships. Mobile payments
services such as M-Pesa, Square, PayPal,
and Google Wallet are rapidly gaining volume in various payments markets. While
the impact on incumbents is negligible
now, it could soon become significant.
Roger Rudisuli and Doran
Schifter, Corporate Bond ETrading: Same Game, New
Playing Field, mckinsey.com,
August 2013.
eWise in the United States, and Konto-
up, disrupting four historical strengths that
pecially payments. This kind of infrastruc-
13
Second, new aggregators—like Mint and
A third disruption is the emergence of
new fully electronic service models—a direct threat to the branch network. Remote-only banks such as Simple in the
United States, Russia’s RocketBank, and
comdirect in Germany compete on the
basis of innovative tools for users to examine their personal finances. They are
able to offer a fairly full range of services,
which they often source from traditional
banks and sell on a white-labeled basis.
National Australia Bank has countered
with its own remote-only service, UBank,
The same disintermediation of banks in
a move that other incumbents will likely
their relationship with customers is also
adopt. And many smaller banks, unafraid
well advanced in wholesale banking.
of cannibalizing their main offering, have
New electronic-trading platforms now
come to market with new remote-only
dominate several asset classes, includ-
banks. In the end, whether the impetus
ing treasury futures, cash equities,
comes from start-ups or other banks, the
17
Breakaway: How Leading Banks Outperform Through Differentiation
Exhibit 6
In this context,
the “Triple
Transformation”
imperative is
more relevant
than ever
The “Triple Transformation”
1 Economic
transformation
Activate drivers of growth
2 Business model
transformation
Retail: Innovate and improve services
Improve capital efficiency
Drive cost efficiency
Private banking: follow wealth creation
Corporate: cross-sell and lean
Capital markets: continue to restructure
3 Cultural
transformation
Improve organizational health
Change short-term profit-taking mindsets
Foster disciplined risk culture
Strengthen reputation
Source: McKinsey analysis
effects are the same: heightened competi-
remember that in its early days, PayPal
tion, and margin compression.
was a system for users of Palm Pilots to
Finally, new peer-to-peer (P2P) businesses are making major inroads into lucrative consumer lending, especially in the
United Kingdom and the United States.
LendingClub, the US-based P2P lender, is
14
15
“Google Buys Stake in
LendingClub Startup Valued at
$1.55 Billion,” Bloomberg, May 2,
2013.
Toos Daruvala, Miklos Dietz,
Philipp Härle, Joydeep Sengupta,
Matthias Voelkel, and Eckart
Windhagen, The Triple
Transformation: Achieving a
Sustainable Business Model: 2nd
McKinsey Annual Review on the
Banking Industry, mckinsey.com,
October 2012.
beam payments back and forth between
handheld devices. This failed almost immediately— but PayPal was reborn to become a potent force in payments.
■
■
■
closing in on $2 billion in funded loans.14
In McKinsey’s second annual review of
Zopa is similarly gaining ground in the UK
the banking industry, 15 we argued for a
market for retail lending. These P2P busi-
“triple transformation” that could lead the
nesses are neutralizing banks’ traditional
banking industry to sustainable health.
advantage in risk assessment, though
One year later, with the industry context
they may eventually struggle as cus-
still sober and investors’ and other
tomers get stuck with unforeseen risks
stakeholders’ expectations unmet, this
that are difficult to mitigate.
transformation is even more important
Many of these would-be disruptions will
(Exhibit 6). In the following chapter, we
fail, of course, but some will certainly suc-
will review the considerable progress
ceed. Bankers that find some of these in-
banks have made on this agenda, and
novations dubious might want to
the work still to do.
18
Breakaway: How Leading Banks Outperform Through Differentiation
The Industry’s Transformation:
Early Progress, More to Do
There were real signs of progress at some individual banks
as they embarked on the triple transformation of their
economics, business models, and culture. But for the
industry overall, there is still much to be done to translate
these intense efforts into measurable results.
19
Breakaway: How Leading Banks Outperform Through Differentiation
Economic transformation
look) (Exhibit 7). Some parts of banks’
In last year’s report, we suggested that
economic transformation are moving in
banks:
the right direction, with clear progress on
■ improve their capital efficiency by re-
key indicators like capital ratios and loanloss provisions (at least at developed-
viewing and restructuring loan books,
world banks). On costs, progress has
enhancing risk models, and improving
been spotty: some banks have done
collateral management
spectacularly well, but for the industry as
■ find new sources of growth, especially
a whole, costs are essentially flat. On bal-
specific opportunities that might be
ance, progress is evident, but there is a
hidden within uninteresting averages
long way to go. We estimate that, of the
■ cut costs, by simplifying businesses,
streamlining operating models, optimizing processes, and shifting more activities to low-cost locations
three- to four-percentage-point performance gap (ROE minus COE), banks closed
about 10 percent last year. In the first half
of 2013, banks notched up another small
gain, of about half a percentage point,
One year on, it seems the glass is half-full
driven mainly by banks in Japan and the
(or half-empty, depending on your out-
United States.
Exhibit 7
Banks have
made some
progress on the
drivers of
economic
transformation
Glass half full…
… or glass half empty?
ROE
ROE improved in 2012
Current improvement not sustainable
as it was mostly driven by one-offs
Growth
Industry revenues after risk costs
have now exceeded their 2007 peak
Industry revenue growth still well
below pre-crisis levels
Margins
Despite pressures, margins slightly
increased to 313 bps in 2012 from 312
bps in 2011
Margin compression expected in
future
Risk cost
Normalized at about 23 bps for
advanced economies
Rising above 70 bps for China, other
emerging economies, GIIPS & Cyprus
Operating cost
Fell to 194 bps of assets for emerging
economies
Rose to 191 bps of assets for
developed world
Deleveraging
Tier-1 capital rose from 8% in 2007 to 12% by
2012, making banking healthier; wholesale
funding costs normalizing for most markets
Deleveraging drags on performance;
outside the US, industry still too
reliant on balance sheet financing
Source: McKinsey analysis
20
Breakaway: How Leading Banks Outperform Through Differentiation
Clear positive signs
to 2012, total industry-wide tier-one capi-
Start with the good news. In 2012, two
tal increased by 73 percent.17
clear signs of improving economic per-
Second, the banking industry in devel-
formance emerged. First, the banking in-
oped markets has brought down its loan-
dustry has gone from dangerously
loss provisions. In 2009, loan-loss
undercapitalized to well capitalized — a re-
provisions peaked at 30 percent of in-
markable achievement. In 2007, the indus-
come for US banks and 27 percent for
try held tier-one capital of just 8.4 percent
Western European banks. Even in 2011,
of assets, reserves that would barely sat-
provisions were still quite high—18 per-
isfy Basel III’s minimum capital require-
cent and 20 percent of income for US and
ments, let alone the management buffers
Western European banks, respectively.
and systemically-important-financial-institution surcharges that are now coming. At
8.0 percent, Western European banks
were particularly troubled, given impending
changes in definitions of tier-one capital.
2012 was the best year in a long while for
developed-market credit performance.
Years of restructuring and substantial
write-offs have reduced debt to much
more sustainable levels for borrowers.
And quantitative easing has reduced debt
In 2009, loan-loss provisions
peaked at 30 percent of income
for US banks and 27 percent for
Western European banks
service costs to extraordinarily low levels.
Along with a reviving US economy, these
developments allowed US banks to improve 2012 loan-loss provisions to only 9
percent of income. Similarly, in much of
Western Europe, the ratio improved to 11
percent. However, in the so-called GIIPS
countries (Greece, Ireland, Italy, Portugal,
By year-end 2012, however, the industry
and Spain), and in Cyprus, 2012 loan-loss
had transformed its capital position,
provisions surged to a record high 46 per-
through a combination of capital raisings,
cent of income.
retained earnings, and risk-weighted-asset
16
17
18
“EBA publishes results of the
Basel III monitoring exercise as of
30 June 2012,” eba.europa.eu,
June 30, 2012.
Our analysis did not normalize for
differences in accounting rules
between Europe and the United
States.
Cost to assets is a good indicator
of changes in cost over time; the
popular cost-to-income ratio can
be skewed by changes in income
(a common occurrence) and to
differences in the way income is
calculated across countries.
optimization (including deleveraging). At
Mixed performance on costs
12.0 percent tier-one capital, the industry
On costs, 2012 saw a mixed performance.
is now well on track to meet Basel III (and
For the industry in aggregate, costs were
other) requirements as they take effect.
about flat—the cost/asset (C/A) ratio for the
Western European banks in particular
industry rose to 1.91 percent in 2012, up
made a remarkable turnaround. After
from 1.89 percent in 2011.18 In the United
many banks failed the (lenient) region-wide
stress tests in June 2012,
16
by year-end
States, C/A has been flat since 2009. Over
the same period, C/A has increased in Eu-
the region as a whole had reached a 12.7
rope but has fallen in many emerging mar-
percent tier-one capital ratio. From 2007
kets in Asia, and in Latin America.
21
Breakaway: How Leading Banks Outperform Through Differentiation
To be sure, a few banks were able to cut
saw costs and assets grow (or decline) at
costs, some by impressive amounts. In-
essentially the same rate, making no
tensive end-to-end cost-reduction pro-
progress on cost efficiency.
grams have cut billions at some of the
largest global banks, including UBS and
Some lingering concerns
Bank of America. Many nationally focused
The economic transformation of the bank-
banks like Lloyds have also achieved
ing industry still has a long way to go.
strong results on cost reduction.
There are three important concerns.
However, only six of the eight largest
First, industry revenue growth is slowing
banks were able to lower their C/A in
as economic growth in developing mar-
2012. This is of a piece with a longer
kets slows. (Consider for example China;
trend. Exhibit 8 presents the results for
the Economist Intelligence Unit, among
the 500 largest banks over the four years
others, recently lowered its predicted
2009 to 2012. Several banks were able to
growth rate through 2015 from 13.6 per-
cut costs faster than assets grew. Others
cent to 10.8 percent.) Banking-industry
were less successful; their costs grew
revenues rebounded at a 9.4 percent
faster than their asset base. Most banks
compound annual growth rate from 2008
Exhibit 8
Some banks
have improved
cost efficiency,
but the industry
on average has
not
Cost efficiency of top 500 banks globally, CAGR 2009-2012
Percent
Total assets
20
Banks that were
unchanged1
54%
Banks that
improved1
15
30%
10
5
0
Banks that got
worse1
16%
-5
-10
-10
-5
0
5
10
15
20
Opex
1
Banks that improved their cost efficiency had an Asset-OPEX growth differential of at least +0.5 standard deviation (+4.7%) above the average difference. Banks whose cost
efficiency deteriorated had an Asset-OPEX growth difference of at least -0.5 standard deviation (-4.7%) below the average. Banks with unchanged cost efficiency were within +/- 0.5
standard deviation of the average Asset-OPEX growth difference.
Source: McKinsey analysis, Thomson Reuters
22
Breakaway: How Leading Banks Outperform Through Differentiation
to 2010, as expanding revenues in devel-
loans still represent 87 percent of total pri-
oping markets offset the contraction in
vate nonfinancial debt outstanding; in the
the United States and Western Europe.
United States, the comparable figure is 57
From 2011 to 2012, global revenues grew
percent. Europe is at about the same level
by 4.4 percent—the second year in a row
as non-Japan Asia (90 percent), where
at this new, much lower level of growth.
corporate-bond markets are nascent.
After 30 years of expansion, global banking revenues as a percentage of GDP
(both in real terms) fell in 2011, and we
expect this “penetration rate” will not
grow again until 2020 at the earliest.
To sum up the work on economic transformation in 2012: banks have done much
to reduce their risk profile—improving
their capital base, addressing costs, and
so on. They also have built a strong position in liquidity: US banks in particular
hold more cash and government securi-
Many banks have made real
progress in optimizing their
business portfolios and ridding
themselves of “bad” and
nonstrategic assets.
ties than at any time in the past six years.
However, investors are still reluctant to tie
up their capital in banks. The consensus
of analysts’ views on cost of equity suggests that, while it has come down significantly since 2009, COE remains
substantially higher than in 2007.
Business-model transformation
Second, developing-world loan-loss provi-
In our 2012 report, we suggested that:
sions (LLPs) are beginning to rise at a
■ Most banks should rethink their institu-
somewhat alarming rate. Loan-loss provisions at Latin American banks rose from
1.48 percent of assets in 2011 to 1.59 percent in 2012. In Brazil in particular, we expect these numbers to rise substantially in
2013. Similarly, LLPs in India rose from 0.61
percent in 2011 to 0.63 percent in 2012
and are on course to increase in 2013 as
well. In China, LLPs fell from 0.29 percent in
2011 to 0.27 percent in 2012, but they are
still higher than in 2010 (0.25 percent).
Finally, outside the United States, the
tional portfolios, shifting resources to
capture growth and cleaning up bad
assets
■ Retail banks should reinvent their customer proposition, to meet rising expectations
■ Wholesale banks should more fundamentally re-tool; corporate banks
should diversify revenue streams, and
capital-markets businesses should reconfigure to build on their true
banking industry is still too reliant on bal-
strengths in managing risk, serving
ance-sheet lending, as opposed to debt
clients, and running efficient infra-
capital markets. In Western Europe, bank
structure
Breakaway: How Leading Banks Outperform Through Differentiation
Many banks have made real progress in
Similarly, banks have taken decisive steps
optimizing their business portfolios and
to divest their noncore businesses, with
ridding themselves of “bad” and non-
many of them going to other banks for
strategic assets. The retail industry is also
which they are a better strategic fit.
systematically reinventing itself “from the
Global banks have divested at least $722
customer back”—increasing value to cus-
billion of assets since 2007. US- and UK-
tomers and eliminating unnecessary com-
headquartered banks have led the charge
plexity. And wholesale divisions are also
in portfolio rationalization, accounting for
taking steps.
23 percent and 22 percent, respectively,
of deal value.
Since the onset of the
financial crisis, many banks have
indeed taken decisive action to
wind down underperforming and
noncore assets.
All this represents a big step forward—but
more is needed. New research from McKinsey concludes that, for a variety of reasons, European banks are considering the
sale of some 475 businesses.19 Some
new research from the Bank for International Settlements20 suggests that, for the
biggest and most complex institutions,
such sales may be smart in their own
Portfolio optimization
right, as diversity of revenues is only ef-
Since the onset of the financial crisis,
fective up to a point. Adding retail busi-
many banks have indeed taken decisive
ness to wholesale banks, or vice versa,
action to wind down underperforming
produces higher ROEs. But this diversifi-
and noncore assets. To illustrate, in
cation effect fades as the mix between
2009, nine big banks around the world
the two becomes equal; ROEs start to fall
had isolated $900 billion in assets in sep-
back to levels only slightly higher than un-
arately reported “bad bank” units; at
diversified banks. Markets may be a step
year-end 2010, nine big national
ahead in figuring this out: very large, com-
schemes in Western Europe and the
plex, and nontransparent banks are start-
United States held another $560 billion.
ing to see their valuations discounted.
By year-end 2012, these institutions and
19
20
governments had made material
Retail reinvention ‘from the customer
progress. The banks cut their assets by
back’
27 percent and the national schemes by
In 2012, banks had some success putting
Patrick Beitel, Pedro Carvalho,
and João Castello Branco, “What’s
next for the restructuring of
European banks?”, mckinsey.com,
August 2013.
70 percent. However, it is turning into a
the focus back on customers and clients.
Sisyphean struggle. New bad banks
Some banks were able to make funda-
sprang up in 2011 and 2012, and as a
mental changes to become more cus-
Gambacorta and van Rixtel,
“Structural bank regulation
initiatives.”
result, the industry still holds some $1.1
tomer- and client-centric, with Spanish
trillion in bad assets.
banks leading the way. CaixaBank, for ex-
23
24
Breakaway: How Leading Banks Outperform Through Differentiation
ample, created an innovation lab, hiring
and services to meet customers' rapidly
creative talent from outside banking and
changing needs.
structuring the unit as an independent
subsidiary to insulate it from the rest of
New approaches in corporate and in-
the bank. BankInter has likewise created
vestment banking
an innovation unit, drawing on its own ex-
In corporate banking, the value of cross-
perts and others from technology firms
selling has long been known but has
and universities. CheBanka has rethought
proved difficult to achieve. In 2012, some
online banking; its new app for iPhone
leading corporate banks began to tackle
looks nothing like traditional bank sites
the problem in new ways. A few are shift-
and is proving a hit with young, tech-
ing from a sales-management approach
savvy consumers.
based mainly on volume and total revenues to a focus on value-added services.
Very large, complex,
and nontransparent banks
are starting to see their
valuations discounted.
Others are introducing a “shadow” counting system to measure relationship managers’ (RMs) results on all products. Banks
are also aligning incentives between corporate bankers and product specialists (such
as transaction-banking specialists and investment bankers). Finally, some are piloting a centralized marketing-intelligence unit
Elsewhere, Australia’s Commonwealth
that supports RMs in developing commer-
Bank has developed a clever property
cial initiatives targeted to specific clients
app; by pointing their smartphone’s cam-
and products, particularly those products
era at a house, users can bring up the
such as transaction banking with which
property’s sales history and local informa-
many RMs are less familiar.
tion. Russia’s Sberbank has pioneered an
SMS-based service for peer-to-peer payments, and has equipped some of its
ATMs with the ability to make loans on the
spot. JP Morgan Chase’s Blueprint service allows customers to create, manage,
and track payment plans.
In capital markets, several banks are moving forward on the triple-transformation
agenda. UBS, among others, made big
changes to its business mix in 2012. In
the wake of these shifts, some leading
banks are undertaking a fundamental reassessment of the shape of the busi-
All these enhancements are steps in the
ness—and the balance sheet that
right direction, but there is still some
supports it—considering variables such
ways to go. Even the leading banks can-
as regulatory capital requirements, lever-
not yet match tech-driven companies
age, and funding. This kind of multivari-
such as Amazon in their commitment to
able optimization exercise can help banks
continual transformation of their products
determine long-term business viability and
Breakaway: How Leading Banks Outperform Through Differentiation
optimize product-portfolio and balance-
the bank’s planning and decision-making
sheet assets. Some banks are also con-
processes are brought in line with new
templating changes to their traditional
risk-culture principles.
product-oriented structure and are developing capabilities that can be deployed
across asset classes. These capabilities
include an “execution factory,” a risk and
solutions group, and a funding and financing arm.
Already, though, several leading global
banks are taking important steps to regain
the public’s trust, redefining strategies,
policies, practices, and compensation to
shift employees’ behaviors and mind-sets.
On compensation, European banks in
particular will be prompted to make
In 2012, after a spate of
billion-dollar losses, many banks
raised operational risk to the top
of their priorities.
progress soon, as new EU guidelines take
effect. In the future, bonuses won’t be allowed to exceed salaries by more than 2x,
and 40 to 60 percent of bonuses will be
deferred for three to five years. At least
half of bankers’ bonuses will be paid in
shares or other securities, not cash, and
shares will have to be held for a period of
Cultural transformation
time. Bonuses will be subject to “claw-
In the previous version of this report, we
back” should the profits on which they are
suggested that banks start to rebuild a
based prove to be only temporary.
risk culture and compensation model
that would restore public trust and increase the safety and soundness of the
banking sector. One year on, some
progress is evident. But banks should be
aware that patience and tenacity are crucial. Big banks will need to build a broad
consensus among the company’s top 50
or 60 leaders about the current culture’s
weaknesses. Then they must agree on
and clearly define the kind of culture they
want to build. This is no small task; it
typically requires agreement on four or
five core statements of values about the
21
“Morgan Stanley Compensation &
Governance Practices,”
morganstanley.com, March 2013.
Many banks are making changes to compensation schemes. Morgan Stanley, for
example, has announced the revisions it
made in 2012, 21 the latest in a series of
changes stemming from the crisis. It
upped the equity component of deferred
bonuses from 33 percent to 50 percent.
It extended the vesting schedule for the
deferred cash portion of bonuses from
two years to three. And it established a
quarterly review process to identify and
evaluate situations in which clawback
might be needed.
desired culture—statements that imply
In 2012, after a spate of billion-dollar
clear process changes. Changing the op-
losses, many banks raised operational
erating environment of a large organiza-
risk to the top of their priorities. Critically,
tion takes at least two to three years, as
they are shifting from a taxonomic view, in
25
26
Breakaway: How Leading Banks Outperform Through Differentiation
which classification and measurement
2012 banking still occupied the bottom of
were thought to be sufficient, to a
a leading global index of trust.22 It will
process-based view that looks for the
clearly take many years for banks to effect
breakpoints in chains of activity. In an-
a full cultural transformation.
other move, many banks are shifting from
trailing measures to real-time metrics,
with more tightly defined tolerances. And
they are establishing new norms for risk
taking, encouraging transparency and respect for risk.
22
2012 Edelman Trust Barometer,
edelman.com.
■
■
■
Up to this point, we have discussed the
context and the challenges facing banks
(Chapter 1), and banks’ tactical responses to date (Chapter 2). In the follow-
Yet, as an indicator of just how long the
ing chapters, we shift to a forward-looking
process to transform the culture will be, in
focus on strategies for value creation.
Breakaway: How Leading Banks Outperform Through Differentiation
Leaders’ Breakaway Strategies
If the industry is to achieve a triple transformation, it cannot
happen if banks try to pull all the available levers at once.
Our new research identifies the five focused strategies that
when well executed are driving the outperformance of today’s
leading banks. These banks and their distinctive strategies
explain much of the value creation in the sector in recent years.
Several of the other banks creating value today appear to be
buoyed by the growth markets in which they operate – a less
reliable source of value. Meanwhile, banks with a price-tobook ratio of less than one have choices to make. Some are
following a focused strategy but need to redouble their efforts
on execution to deliver financial results that will restore
market confidence.
27
28
Breakaway: How Leading Banks Outperform Through Differentiation
Exhibit 9
The market
expects that
most valuedestroying
banks today will
continue to do
so in the future
Value creation outlook for top 500 banks globally, 2012
Percent
P/B1
22%
Not currently
creating value but
expected to in the
future
32%
Market expects value
creation to continue
as in the past
1.0x
38%
Not currently
creating value and
market expects this
to continue
8%
ROE1-COE
1
Currently creating
value, but market
expects value
creation to stop or
other impairments of
assets to occur
0%
Equity adjusted for goodwill
Source: Thomson Reuters; McKinsey Global Banking Pools
Many others, however, are trying to do
confirm that the crisis has passed, but un-
too many things – their strategies have
certainty about growth and profits remains
converged on a muddy middle that is diffi-
very much alive. Many banks have re-
cult to execute and unlikely to create
sorted to pulling out all the stops, in an “all
value. If these banks can concentrate
hands on deck” approach. These banks
their strategy and execution on one of the
are pulling a plethora of levers to boost
five dominant sources of value, they can
revenues, cut costs, and improve capital.
significantly boost their performance.
They are simultaneously articulating to investors both a growth story and an efficiency story, in an attempt to improve
Clear strategy and disciplined
execution pay off
returns and create shareholder value.
The pressures we discussed in Chapter
As many banks struggle to respond to
1—weak macroeconomic conditions,
this context, we observe two undesirable
growing financial nationalism, a new wave
effects. First, lackluster operating per-
of regulation, and dynamic and intense
formance: only 69 of the top 500 banks
competition—have challenged banks’
reduced cost-to-assets while also in-
strategies. A number of financial indicators
creasing margins from 2009 to 2012.
29
Breakaway: How Leading Banks Outperform Through Differentiation
Exhibit 10
Market leaders
follow one of
five clear and
distinctive
strategies
Performance classification of top 500 banks globally, 2012
Percent
500
Outperforming 2
Performing with
the market 2
Underperforming 2
18%
36%
Distinctive strategies
Number
of banks
Share of assets of
all 500 banks1
Global at-scale
universal
7
12.8%
Balance sheet-light
investment specialist
9
2.4%
Distinctive customer
franchise
22
8.6%
Back-to-basics
25
5.5%
Growth-market
leader
27
4.4%
46%
1
Total banking assets (including intangible assets, receivables, etc.)
2
For full definition, see “Identifying outperformance” on page 30
Source: Thomson Reuters, Capital IQ, McKinsey Global Banking Pools
Second, underwhelming returns: 60 per-
ment decisions and their operating ap-
cent of the top 500 banks return less than
proach. By eliminating distractions, they
their cost of equity.
are able to execute more effectively.
Further, the markets are unconvinced that
Eighteen percent of the 500 banks we
many banks will improve in the foresee-
studied meet these three tests (Exhibit
able future. By assigning them a price
10). (See “Identifying outperformance” on
lower than book value, the market expects
page 30 for more on the analysis.) These
63 percent of these underperformers will
90 banks have benefited from their disci-
not create value in the future (Exhibit 9).
pline and performance, generating higher
In contrast, outperforming banks combine
clear strategy, consistent execution, and
23
Other banks include those
performing with the market and
underperforming banks; see
“Identifying outperformance” on
page 30 for definitions of these
groups. Returns on equity (ROEs)
are simple averages; weighted by
assets, the outperforming 90 had
a 12 percent ROE, and other
banks 9 percent.
the financial results needed to win in-
returns (ROE of 15 percent versus ROE of
7 percent for all other banks23), higher
margins, and higher revenue growth.
vestor confidence. These banks have
This has resulted in more value to share-
made their primary approach to value cre-
holders (22 percent total returns to share-
ation clear to their boards, employees,
holders (TRS) from 2009 to 2012 compared
customers, and shareholders. Their
with 8 percent for the rest). The market has
strategies are paramount in their invest-
awarded these banks higher P/B multiples
30
Breakaway: How Leading Banks Outperform Through Differentiation
Identifying
outperformance
We have long understood that geography is a key determinant of financial performance for banks. In fact, the correlation between banks’ performance (ROE) and that of the
markets in which they operate is just over 50 percent. This is
a consistent relationship; it has risen every year since we first
examined it in 2008, when the correlation was 34 percent.
In our new research, we sought to understand how banks can
outperform—that is, how they can deliver results better than
would be predicted simply by their “geographic destiny.” We
focused on publicly available information on 500 banks with
assets of more than $1 billion in 2012. See the Appendix for
more information on the databases used. Of these banks, 270
were value-creating (that is, they had a price/book ratio of
greater than 1, based on book value at year-end 2012 and
share prices as of September 2013). Given that financial results can sometimes be an unreliable indicator of actual performance, we sought to combine science (an analysis of the
available data) with art (expert opinion) to help inform the
strategic thinking of the industry. In so doing, we discerned
five strategies that are clearly creating value today.
Data-driven analysis
We first engaged in a structured, data-driven review of publicly available financial information on the 270 banks with
price/book ratio of greater than 1:
■ We identified a set of primary quantitative indicators of
performance: revenue growth, cost/asset ratio, margin, return on equity, and return on assets. We also looked at
some secondary or informational indicators, such as tierone equity ratio and dividend payout ratio.
■ We calculated a median for each primary indicator in each
geographic market, based on the financial performance of
banks headquartered there.
■ We identified banks that meaningfully outperformed their
markets on two or more of these primary performance indicators.
■ We compared those banks with multiple primary indicators of outperformance across markets to identify consistent patterns. For example, we found that banks with
cost/asset ratios below their market average often also
have lower loan-loss provisions and higher dividend payout ratios. In another example, we found a set of banks
with very high margins and ROEs and also high tier-one
equity ratios and high cost/asset ratios.
■ From this analysis, we identified five consistent patterns or
archetypes of outperformance. We created an initial set of
rules or boundary conditions that would identify a bank
with an archetype. For example, we determined that a
“growth-market leader” must have higher growth and ROE
than the average bank in their primary market; and that
market must itself be growing by at least 5 percent annually.
■ As discussed below, we validated this data analysis with an
expert understanding of the strategies and execution capabilities driving the observed differences in financial results across the five archetypes of outperforming banks.
■ Finally, we engaged in an iterative process to refine our
quantitative rules—to sharpen differences among the five
archetypes and to enhance internal consistency within
them. In the section “Five clear strategies for outperfor-
Breakaway: How Leading Banks Outperform Through Differentiation
mance” on pages 32 to 34, we identify the most relevant
quantitative criteria for each strategy.
Expert validation
After this initial quantitative screening, 128 banks of the 270
with price/book ratio greater than 1 met our criteria for outperformance. Recognizing that publicly available financial
results do not tell a complete story, and that banks’ operating
environments can have material and practical differences, we
then engaged in a qualitative review of the same 270 banks.
We considered publicly available information on their strategies and activities. We also conducted a series of interviews
with in-house and industry experts.
Through this qualitative review, we eliminated many banks
from the outperformer category; these were primarily small
banks from emerging markets with anomalous financial results. We also added several banks that did not meet all the
quantitative financial criteria we established, but —in the
view of our experts— owed their value creation to choosing
and executing one of the five clear strategies.
This analysis thus identified three groups of banks within the
500 we studied. First, 90 were identified as outperformers
with strategies, execution, and financial performance that
create value today. Second, 180 were identified as “performing with the market,” generating price/book greater than 1
largely due to their favorable geography. Third, 230 other
banks have a price/book ratio of less than 1. In this third
group, some are midway through strategic transformations
that should in time be recognized by the market. Others are
more muddled and still trying to do too many things.
31
32
Breakaway: How Leading Banks Outperform Through Differentiation
(2.0 versus all others at 1.0). Nor is this a
one-time event: the P/B of these 90 banks
Five clear strategies for
outperformance
has risen 5 percent since 2008, whereas
While the 90 leading banks are geographi-
other banks in the sample saw a decrease
cally diverse, the number of strategies
of 19 percent over the same period.
they follow is surprisingly small. In fact, all
The 90 outperformers come from all over
90 can be reasonably classified into one
the world, including several banks in each
of five clear strategies:
of Africa, Asia, Europe, Latin America,
South America, and North America. Sur-
■ Distinctive customer franchises:
Banks using this strategy deliver
prisingly, despite the macroeconomic
growth and returns by providing a no-
headwinds in the developed world, the
tably exciting customer experience
outperformers are primarily concentrated
from beginning to end, for which cus-
in these markets (59 percent, holding 86
tomers are willing to pay a premium.
percent of the outperformers’ assets and
(Not every market has such a customer
representing 75 percent of the group’s
base.) Serving customers well is impor-
market capitalization) (Exhibit 11). US
tant in other strategies, but the objec-
banks are prominent (26 percent of the 90
tives are different. Customer-franchise
outperformers, 30 percent of assets, and
banks typically focus on retail and
29 percent of market cap).
commercial clients; the strategy is
Exhibit 11
The five distinctive strategies
are found everywhere, but are
concentrated
in developed
markets
Geographic distribution of top 500 banks globally, 2012
Percent
100% =
500
180
Developed market
90
Emerging market
North America
18%
28%
Western Europe
17%
Other developed
22%
4%
9%
8%
4%
China
32%
19%
9%
2%
51%
Other emerging
40%
Top 500
banks
38%
“Performing with
the market” banks
Source: Thomson Reuters, Capital IQ, McKinsey Global Banking Pools
Outperforming
banks
33
Breakaway: How Leading Banks Outperform Through Differentiation
more difficult to achieve with corporate
■ Growth-market leaders: These banks
and institutional clients. To make the
deliver strong top-line growth by out-
grade, banks must have an after-risk
performing others in fast-growing mar-
margin at least 10 percent higher than
kets. These banks have better growth
the market average. They are also
rates and ROEs than the market aver-
readily distinguished by well-designed
age, and a growth rate in home mar-
products, a market-leading digital offer-
kets of more than 5 percent annually.
ing, high share of wallet, and high customer-loyalty scores.
■ Back-to-basics banking: This strat-
■ Global at-scale universals: These
banks deliver steady profit growth
through a relentless quest for global
egy delivers steady profit growth
economies of scale and scope. To be
through a simple proposition, sustain-
included in this category, banks must
able cost advantages, and tightly man-
derive more than 30 percent of their
aged risk. These banks have a
revenues from operations outside their
cost-to-assets ratio 30 basis points
home market(s), and at least 20 per-
lower than the market average and
cent each from retail and wholesale
have a dividend-payout ratio of more
banking.
than 20 percent.
Exhibit 12 (page 34) shows the financial
results of following a strict strategy and
identifies the different sources of strength
The top 90 banks have been
successful by adhering to a set of
principles specific to their strategy.
for each.
Of course, as explained in “Identifying
outperformance” on page 30, many banks
outside the 90 top banks have attempted
one of these strategies. In and of itself,
■ Balance-sheet-light investment
specialists: These banks deliver
strong returns by focusing on valueadded, technology-intensive, low-risk
institutional services while avoiding
capital-intensive activities. The criteria for this group includes a revenue/
assets ratio of more than 10 percent
and a capital/assets ratio of more
than 15 percent, and they must derive
more than 50 percent of their group
revenue from wealth- and asset-management activities.
picking a strategy is no guarantor of success. Outperforming banks have chosen
one strategy and focused on execution,
as we discuss next, and markets have received the message.
How outperformers create value
The top 90 banks have been successful
by adhering to a set of principles specific to their strategy. In this section, we
discuss the characteristics of each strategy, and its principles. We have also
chosen familiar examples to illustrate
34
Breakaway: How Leading Banks Outperform Through Differentiation
them, though of course there are many
that customers are willing to pay more for
examples of banks successfully execut-
it. Investing in a distinctive offering can be
ing these principles. The examples are
expensive; these banks typically have a
drawn from both outperforming banks
higher cost/asset ratio than the average
and market performers that excel on a
player in their market. But they use these
few elements of a strategy, but for vari-
investments to power higher margins;
ous reasons have not yet been recog-
their cost/income ratios are strong.
nized by markets for their strong
Banks such as US-based Wells Fargo &
performance.
Company and India’s HDFC Bank emphaDistinctive customer franchises
size superior, comprehensive offerings to
Banks following this strategy deliver a su-
retail and commercial customers. They
perior customer experience that is re-
are selective in how they serve corporate
warded by premium economics. By no
customers—typically “championing” na-
means are they the only banks that value
tional corporates whom they know well,
their customers; the difference is that they
rather than facing global universal banks
deliver something that is so much better
head-on in international markets.
Exhibit 12
The five winning
strategies create
value in different
ways
Selected performance
measures of top 500 banks
globally, 2012
Percent
ROE
ROA
22
2.5
18.8
18
Growth-market leaders
Back-to-basics
Balance sheet-light investment specialists
Global at-scale universals
75th percentile
0.0
Mean
Distinctive customer franchises
25th percentile
Margin
12
2.0
Cost-to-assets
Revenue growth2
12
25
10
20
8
15
6
10
10
1.8
17.2
16.8
1.5
14
8
13.6
11.6
1.3
12.0
1.0
10
1.0
6
6.1
6.7
0.9
4
4.6
0.5
8
7.1
0.4
0
4
4
1
Assets and equity adjusted for goodwill
2
2008-12 CAGR
Note: Outliers excluded (e.g. >40% margin, -31% revenue growth)
Source: Thomson Reuters, Capital IQ, McKinsey Global Banking Pools
4.7
3.0
4.2
3.6
2
5
3.7
2
0
2.6
2.4
2.5
00.7
0
-5
6.8
35
Breakaway: How Leading Banks Outperform Through Differentiation
Nordea is successfully executing many el-
tionship banking for the segments that
ements of the distinctive customer fran-
appreciate it.
chise strategy. It views its dealings with
customers not as a series of isolated
transactions, but as an ongoing and “endto-end” relationship. The bank fully commits to customers that commit to it; these
■ Invest in a superior customer experience while focusing on efficiency behind the scenes, in commoditized
activities.
“relationship customers” have more than
■ Establish and defend premium pric-
five products, worth at least €30,000 in
ing for services that deliver superior
either savings or loan volume. It provides
value while also creating pricing struc-
dedicated banking advisors to relationship
tures that can attract new customers
customers, and special branches to give
and reward loyal customers.
them advice. Over the years, the bank has
invested in a robust digital experience;
more than 85 percent of the households it
serves do their banking online. Front-line
staff spend more than 40 percent of their
time with customers—an unusually high
figure. As is typical of banks using this
strategy, the bank achieves a price pre-
■ Promote a truly customer-centric
mentality, a view that is creative, dynamic, sincere, and united around the
goal of making customers’ lives and
businesses better.
Back-to-basics providers
mium, while staying in a competitive
Banks in this group deliver steady profits
range. Finally, it has invested in lean im-
through continual de-risking and by estab-
provements and has started to move to
lishing an enduring cost advantage of
straight-through processing in the back
some kind. The strategy responds to a
office, boosting productivity.
deeply felt desire for simplicity on the part
of many customers and stakeholders, including investors. Banks that exhibit char-
Back-to-basics banks
naturally derive their
competitive strength from
excellence in cost.
acteristics of this strategy include
Comerica in the United States and Swedbank in Europe.
Back-to-basics banks naturally derive
their competitive strength from excellence
in cost. Cost is a foremost consideration
in every choice they make, from the
board room to the stock room. They
These banks follow several consistent
guiding principles:
■ Deliver value and convenience in
serve customers well, but unlike distinctive customer franchises, they pass some
of this cost advantage on to their costconscious customers: pricing leadership
meeting the full range of customers’
keeps their margins a little worse than the
needs. These banks enable true rela-
market average.
36
Breakaway: How Leading Banks Outperform Through Differentiation
M&T Bank serves the Northeast and mid-
■ Maintain a “no surprises” balance
Atlantic regions of the United States,
sheet with a preference for “vanilla”
where it has successfully deployed sev-
risks.
eral elements of this strategy. It has performed very well, even through the
financial crisis, by maintaining a low cost
structure (its cost-efficiency ratio is more
than 10 percent lower than most US
banks), staying conservative in its credit
■ Develop a “tight ship” culture, in
which management and employees are
closely aligned on priorities.
Balance-sheet-light investment specialists
underwriting, and providing solid customer service. Its consistently strong performance has made it a core holding of
Warren Buffet.
Firms that exhibit characteristics of this
strategy include those traditionally focused on asset management for retail and
private clients, such as Julius Baer; investment-services specialists like BNY
Investment specialists generate
most of their superior performance
from margins that are much higher
than the market average, and from
a lower asset base.
Mellon and State Street; and investment
banks undergoing reinvention, like UBS.
Investment specialists generate most of
their superior performance from margins
that are much higher than the market average, and from a lower asset base. BNY
Mellon is a familiar example of several elements of this strategy. Over the course of
the past 20 years, the one-time Bank of
The guiding principles for these banks include:
■ Deliver a simple and clear value
New York underwent a profound transformation, from traditional money-center
bank to one of the largest asset managers
and servicers in the world. It got there by
proposition, providing customers with
shedding retail-banking operations in
“just what it says on the tin.”
2001 and 2006, and refocusing its corpo-
■ Maintain a defensible cost advantage, by relying on a simple business
model, relentless cost focus, and programmatic M&A to build economies of
scale.
■ Become a low-cost price leader,
rate-banking franchise on cash management and other transaction services. It
made dozens of strategic acquisitions to
build economies of scale in technology-intensive core businesses—crowned by its
2006 acquisition of Mellon Financial.
Today, BNY Mellon is seeking to innovate
passing part of the cost advantage on
in the face of regulatory change, for ex-
to customers in the form of lower
ample, by making a focused push to be-
prices.
come a leader in collateral-management
37
Breakaway: How Leading Banks Outperform Through Differentiation
services.
These institutions thrive by doing a number of things very well:
■ Stay on the leading edge with “high
IQ” products that meet customers’
rapidly changing needs
■ Manage risk intermediation skill-
scale those cities and micromarkets in
which growth is happening fastest.24
These banks use their outstanding customer proposition primarily for acquisition.
Standard Chartered has for some time
been a well-recognized example of four
growth-market leadership principles. First,
it chose a forward-thinking geographic
fully, with well-developed distribution
portfolio, almost entirely in high-growth
capabilities to minimize balance-sheet
markets in Asia, the Middle East, and
size
Africa. Second, it developed a compelling
■ Deliver agility at scale—both rapid
application development and a robust,
reliable platform
■ Balance sophisticated productivity
proposition for customer acquisition (especially in middle market, less so in consumer), thanks to a global business that
works closely with each country business
to maximize relevance and local appeal.
management in the front office with
That operating model has been a third
intense focus on efficiency in the mid-
strength: country CEOs concentrate on
dle and back offices
top-line business performance, supported
by COOs who work with global functions
Growth-market leaders
to ensure efficiency and effectiveness. Fi-
This strategy is used both by local banks
nally, the bank's culture celebrates its in-
in strong growth economies in which the
ternational diversity and respects the
financial system is taking off (such as
unique qualities of the countries in which
Bank OTP in Eastern Europe) as well as
it operates.
multilocal players with a strong presence
in several growth markets (such as Standard Chartered). These banks have gone
beyond market beta-type returns by driving innovation, bringing the best of the de-
■ Initiate bold, early, at-scale entry
into attractive cities and countries, anticipating future demand rather than
markets, and shaping the financial system.
waiting until it has arrived
growth, and may use different approaches
to suit each market. Value creation comes
See Yaw Agyeniw-Boateng,
Richard Dobbs, James Manyika,
Jaana Remes, Sven Smit, and
Jonathan Woetzel, "Urban world:
The shifting global business
landscape,” McKinsey Global
Institute, mckinsey.com, June
October 2013.
of things very well:
veloped world to emerging high-growth
They proactively seek out hotspots of
24
These banks succeed by doing a number
from shrewd timing and agility, rather than
standard processes. In this way, growthmarket leaders get past the problem of
■ Promote an assertive, “take the
hill” mentality, empowering local talent
to take initiative (while referring to a
consistent playbook)
■ Shape the market with a compelling
“geography is destiny.” Using leading-
offer that can dislodge traditional com-
edge techniques, they identify and enter at
petitors
38
Breakaway: How Leading Banks Outperform Through Differentiation
■ Develop unique insights into nontransparent risks—for example,
building highly predictive qualitative
risk-assessment models for data-poor
markets
today, a much better performance than
the local market average.
The low number of banks successfully
executing this strategy attests to its difficulty. Success is likely to become even
more elusive. As wages escalate, global
economic arbitrage is becoming more
Global universals trail market
averages on margins, but their
immense scale results in
superior cost performance.
These players tend to deliver ROE
at or near COE today, a much
better performance than the local
market average.
difficult. With that, banks’ internal transfer pricing is becoming trickier, and customer focus and efficiency may come
under pressure.
HSBC’s network of servicing centers exemplifies the kind of transformational
change and operational sophistication
required to realize the benefits of global
scale. It was a pioneer in adopting
global offshoring at scale: nearly 60 per
cent of the group’s operations and IT
are conducted in the network. HSBC organizes its shared services through a
Global at-scale universals
Only 7 banks are outperforming with this
model today, though many more are trying. Global universal banks serve customers well by delivering an
unparalleled range of products, serv-
unique combination of products and geographies: for example, the mortgage
servicing group processes most of the
mortgages sold in nearly all the countries (except Hong Kong) in which the
bank provides this product. The approach extends to IT as well; the bank
ices, and geographic coverage, including
has just 4 global data centers. Applica-
both fast- and slow-growth markets.
tion development is done on a family of
They provide strong returns to sharehold-
global cross-product platforms called
ers through a relentless quest for
HUB (HSBC Universal Banking). Cus-
economies of scale and scope. The strat-
tomization for country or line of busi-
egy can be effective whether the bank is
ness is infrequent. The benefits of global
organized as a “multilocal,” or around
scale have been a dependable source of
global product lines.
Global universals trail market averages on
margins, but their immense scale results
strength: the bank’s cost-to-income and
cost-to-assets ratios are consistently
lower than its peers.
in superior cost performance. These play-
The guiding principles for these banks in-
ers tend to deliver ROE at or near COE
clude:
39
Breakaway: How Leading Banks Outperform Through Differentiation
■ Offer a broad range of products
and services across geographies
and channels in sufficient depth to enable economies of scale and scope.
■ Successfully manage transforma-
individual responsibility is paramount to
success and survival.
■
■
■
These five strategies are ushering in a new
tional investment and change re-
age of differentiation in banking. Each of the
quired to realize a consistent,
outperforming 90 banks has chosen one of
integrated technology platform and op-
these strategies and is consistently execut-
erating model.
ing it. Many others are creating value prima-
■ Relentlessly reduce costs by continually improving and simplifying ways of
working in complex activities.
■ Maintain an unassailable balance
rily because of their geography. Several
banks seem to be doing nearly as well as
the outperformers, but have not yet received
recognition from the market. The rest seem
to be operating with indistinct strategies.
sheet, capitalizing on information advantages and diversification benefits
while avoiding “tail risk” surprises.
■ Promote a conservative risk cul-
As we discuss next, as more banks adopt
differentiating strategies, especially if many
embrace the return-to-basics strategy that
this commoditizing, heavily regulated in-
ture—given the complexity of these in-
dustry requires, the sector may take a big
stitutions and the risks they face,
step forward in its return to value creation.
40
Breakaway: How Leading Banks Outperform Through Differentiation
Developing a Strategy for Outperformance: Steps for Banks
And a Path for The Industry
In today’s dynamic market, every bank must continue to
innovate and improve. Outperformers cannot afford to rest
on their laurels; the pressures are too great, and the forces
of creative destruction are too strong. Even outperforming
banks need to take action to ensure sustained success.
Other big banks that aspire to industry leadership have a
different and in some cases more daunting task. As the top
banks pull away, the pressure rises on others to invest in
digital capabilities, better underwriting skills, stronger riskmanagement capabilities, and so on. It will become
Breakaway: How Leading Banks Outperform Through Differentiation
progressively harder to match leading-
Staying ahead
edge skills at the scale and sophistication
For those in the outperforming 90, life is
of the market leaders. Moreover, cus-
relatively good. But the level of perform-
tomers’ perceptions are becoming more
ance required to stay ahead will rise as
acute. In the past, differences among
the industry recovers from the crisis and,
banks were not always visible to cus-
as we discuss below, other banks attempt
tomers. That is changing, and banks can
to fight their way into the top tier.
expect to see more customers sign up
with banks that deliver on their promises,
To consolidate their lead, the outperform-
and drop those that don’t.
ing banks will need to continue to im-
To join the industry leaders, a bank will
archetype. For two strategies in particu-
need to understand which of the five
lar, remaining on top will be difficult in-
strategies best suit it, given its circum-
deed. First, in the global universal model,
stances. Some common paths are likely
we estimate that fewer than 10 banks will
to develop; notably, many banks are likely
be capable of staying ahead of a com-
to find their best fit is with the back-to-ba-
plex array of challenges. Success will de-
sics approach, a good match for an envi-
mand bold choices to distinguish areas
prove within their chosen distinctive
ronment in which some businesses are
less attractive than they used to be.
in which the banks seek global preeminence from those that merit a more focused, niche approach. It will demand
continual innovation to compete effec-
Slowing growth markets
will separate the wheat
from the chaff.
tively with increasingly strong national
banks. It will also require global cost
transformation at a scale and complexity
unprecedented in banking.
Growth-market leaders have another sort
of problem: some of the fast-growth ge-
We expect to see more transactions activity, as big groups get smaller and small
underperformers merge with more capable competitors. Industry utilities will also
likely play an important role, particularly
for those services that back-to-basics
banks want to offer at low cost.
ographies on which they depend are
slowing down, and other attractive markets may be closed to acquisition or new
entrants. Success will go to banks that
are ever more painstaking and thoughtful
about growth, finding specific, very attractive opportunities hidden within disap-
If banks take up this agenda and execute
pointing averages. We expect that the
their chosen strategies, the shape of the
number of banks succeeding with this
industry will change considerably, and its
model will decline significantly; the slow-
health will improve. That will benefit in-
ing of markets will separate the wheat
vestors, customers, and the public.
from the chaff.
41
42
Breakaway: How Leading Banks Outperform Through Differentiation
In all five strategies, one area in which top
Catching the leaders
banks (indeed, most banks) should invest
The position for many of the other 410
effort is digital capabilities. The stakes
large banks is concerning. They are strug-
here are high: banks (especially those
gling with sub-1 price-to-book ratios, an
using the distinctive customer strategy)
ROE that lags behind COE, slow growth—
aspire to provide advanced interfaces and
and in some cases all three. With the
ubiquitous connectivity for customers,
economy subdued in developed markets
and next-generation computing and big-
and slowing in emerging ones, they will
data analytics for staff. If they get the
likely be unable to grow out of their prob-
technology right, banks can propel im-
lems. Even if growth exceeds expecta-
provement in many areas: the customer
tions, other forces such as financial
experience, product and service innova-
nationalism, new regulation, and intense
tion, distribution, revenue and risk opti-
competition could place a low ceiling on
mization, corporate strategy, and others.
banks’ upward trajectory.
The aspiring 410 fall into two categories;
both groups trail the industry leaders by a
Nearly half of the top 500 global
banks are in the second group,
underperformers.
wide margin (Exhibit 13). The first group,
consisting of 180 banks, is performing
with the market; these banks have successfully ridden economic momentum to
achieve satisfactory performance, with
total shareholder returns of 21 percent
That said, digital skills and the investment
from 2009 to 2012 and a current price-
to build them will be different in each of
to-book ratio of 1.5. However, the tail-
the strategies. For example, growth-mar-
winds that have propelled them—strong
ket leaders need compelling online offer-
GDP growth, commodity booms, and so
ings to attract and retain new customers.
on—are unlikely to continue. Many banks
Investment specialists should have two
in this group have also enjoyed the bene-
digital aspirations: a strong “straightthrough” offering for mature trading and
processing activities, and new services
and interfaces that can provide additional
value to customers as well as strengthen
the bank/customer bond. A third exam-
fit of the doubt from their investors; all
banks in this group have a P/B greater
than 1, but roughly 40 percent have
ROEs that trail their COE. Bank leaders
would be unrealistic to expect this to
continue for very long.
ple: distinctive customer franchises will
Nearly half of the top 500 global banks
need advanced data-analytical skills to
are in the second group, underperform-
drive sales and sufficient integration of
ers. These banks have the biggest chal-
digital and physical channels to provide
lenge to improve their fortunes: they will
customers with a seamless experience.
have to further reduce their risk-weighted
43
Breakaway: How Leading Banks Outperform Through Differentiation
assets, significantly reduce costs, and
out a strategy; rather, investors expect
simplify their business focus, all before
banks to make starker strategic choices,
they can chart a course to join the outper-
and be more precise about how they will
forming 90. Put another way, they will
improve performance. Some market per-
have to draw liberally from the triple-
formers may have strong strategies and
transformation agenda set out a year ago.
may even be executing them well, but the
With a current P/B for the group of 0.5,
market for some reason does not recog-
many will be challenged to achieve sus-
nize it. Some underperformers may al-
tainable returns; in an increasingly Darwin-
ready be recovering, with the foundations
ian industry, many will likely become
of a strong strategy in place, and can ex-
targets for stronger rivals.
pect that in time markets will come to appreciate their new direction.
Setting the strategy: Surveying the
For many banks in both groups, however,
options
a strategic reset is in order. As the previ-
Both market performers and underper-
ous chapter outlined, the choice comes
formers need to define and deliver a dis-
down to one of the five strategies de-
tinctive strategy. This does not mean that
ployed by top-performing banks. Three of
these banks are currently operating with-
the five (global at-scale universal, bal-
Exhibit 13
Markets are
rewarding banks
that successfully
execute the five
distinctive
strategies
Price-to-book ratio, 2008-20121
Indexed, 2008 =100 percent
130%
∆ P/B, 2008-12
Percent
120%
P/B, 2012
110%
Outperforming 90
+5%
2.0x
Performing with
the market
-12%
1.5x
Underperformers
-37%
0.5x
100%
90%
80%
70%
60%
0%
1
2008
2009
2010
2011
Arithmetic average of banks with assets of more than $1 billion at year-end 2012.
Source: Thomson Reuters, Capital IQ, McKinsey Global Banking Pools
2012
44
Breakaway: How Leading Banks Outperform Through Differentiation
ance-sheet-light investment specialist,
Given these challenges, many banks will
and growth-market leader) have clear bar-
need to choose between investing to be-
riers to success that any aspiring bank
come a distinctive customer franchise and
must consider.
downshifting to a back-to-basics strategy.
Start with the global universals. As noted,
regulation, difficulty in cutting costs to the
levels needed, the rise of strong competitors in overseas markets, and the challenges of managing a complex
organization make this a challenging aspiration for almost all banks; fewer than 10
are likely to succeed.
While the former is certainly more exciting
for management teams to pursue, many
would be better off with the second option. For most undifferentiated banks, a
distinctive customer franchise requires a
significant investment in areas such as
customer marketing analytics, digital
technology, frontline sales specialists, and
new credit-underwriting platforms. Banks
will have to be able to identify with clarity
While the distinctive customer
franchise strategy is certainly
more exciting, most banks would
be better off with a
back-to-basics model.
and certainty the unique (not just unusual)
benefits that they provide customers with
today, and on which customers choose a
bank. Banks have to be able to depend
on extraordinarily deep customer relationships, loyalty, and satisfaction.
Back-to-basics is likely to be the favored
strategy for banks that are drifting. Obviously, aspirants to this model will have to
The balance-sheet-light model requires at
reduce expenses in many areas, such as
least one of the following at-scale busi-
product development and management of
nesses: a wealth-management or asset-
the branch network. But they will also re-
management business, a transaction-
quire superior, industrial-like processes,
processing business, or a securities and
from “design for manufacture” in product
investment-banking franchise. All are ex-
development to “lean” approaches in
ceptionally difficult to build from scratch.
sales, product delivery, customer service,
And growth-market leadership is location-
and technology.
and context-dependent. A developed-
Most successful customer-franchise and
market bank with no presence in high-
back-to-basics banks are smaller and
growth geographies is unlikely to succeed
more focused than global universal banks.
with organic entry. It will be challenging
To achieve success with one of these two
enough for established growth-market
smaller strategies, some of the largest
leaders to unearth “hot” opportunities as
banking groups that are currently strug-
the overall market cools.
gling will need to make sizable divestitures
Breakaway: How Leading Banks Outperform Through Differentiation
or even break up their banks. The strategic
Even this rough approximation may be
focus required to succeed, combined with
enough for banks to knock a couple of
the organizational penalty of being a com-
models from consideration. To gain more
plex global organization,25 as well as the
precision, they can then compare their
higher capital requirements associated
current performance with the market lead-
with size, will force many large banks to
ers on their short list of models. For exam-
pare back to a model where they benefit
ple, many market-performing and
more clearly from a sustainable advantage.
underperforming banks will find that the
jump to global universal is too difficult, and
Setting the strategy: How strong is
their configuration unsuited to becoming
the fit?
an investment specialist. For some, it will
These strategic choices will not come
make sense to think about a growth-mar-
easily; in fact they go against the grain at
ket strategy (though this strategy, as dis-
many banks that have become accus-
cussed, has some critical dependencies).
tomed to decades of growth. Nor is cul-
If these banks cannot access growth mar-
ture the only problem of adaptation. In
kets, their choices will boil down to two:
every respect, banks will need to assess
distinctive customer franchise or back to
the fit between their current capabilities
basics. Many banks will gravitate toward
and the business models that actually
the former, but they should pause to see
create value.
how they fare on several critical metrics.
One good way to start is by thinking
How much of their customers’ current
through the effect of a given strategy on
spending do they enjoy? The outperforming
the way core functions are organized and
banks that use this strategy routinely re-
managed. Consider technology. For the
ceive 40 percent or more. How do they do
global universal bank, the technology
on customer loyalty? Top banks are recom-
strategy is focused on continual upgrades
mended by their customers more than 80
to systems, to boost capacity, lower
costs, and provide customers with greater
flexibility across markets and products.
For the back-to-basics bank, the focus is
almost exclusively on lowering costs while
maintaining integrity and coherence
across systems. Balance-sheet-light investment specialists prize rapid application development above all. In this same
way, each function (marketing/pricing, risk
25
Martin Dewhurst, Jonathan
Harris, and Suzanne Heywood,
“Understanding your globalization
penalty,” mckinsey.com, July 2011.
percent of their time. What about margins?
If the bank’s margins are only market average, then there’s work to do: leading banks
using this strategy typically charge 20 to 50
basis points more than their competitors. If
the bank comes up short on several of
these metrics, as many are likely to do,
then they should assess their fitness for a
return to the basics, something that many
banks are likely to be able to do.
management, asset/liability management,
Asking these kinds of questions can en-
and so on) will vary markedly from one
sure that banks are not setting their sights
strategy to the next.
on an unreachable goal.
45
46
Breakaway: How Leading Banks Outperform Through Differentiation
Setting the strategy: The industry
public cannot continue to shoulder the bur-
context
den of banking failure, but overcapacity is
As the sails of the global economy con-
only easily reduced through consolidation.
tinue to sag, it is becoming clear that
many banking markets and products suffer from overcapacity. Some consolidation
may be on the way. Many banks will likely
exit businesses in which scale is elusive;
other businesses that are not core to their
strategy, or that consume too much capital, might also be put on the block. Moreover, several banking businesses are still
held by government, which will likely want
to return them to private hands, either
through flotation of shares or sales of entire businesses.
The transfer of ownership of banking assets, potentially on a vast scale, is one
development that strategists will have to
factor in to their calculations. Another
such trend is the rise of industry utilities
and third-party solutions. Some banking
activities, such as credit-card processing,
merchant services, and mutual-fund administration have long been in the hands
of specialist firms. Today, many other activities are shifting away from banks and
toward companies that can do them more
effectively and cheaply: cash management, cross-border payments, current-
Today, many other activities
are shifting away from banks
and toward companies that
can do them more effectively
and cheaply.
account servicing, and corporate actions,
among others. Tomorrow, other activities
could follow this path, including risk rating, credit-risk management, personalloan processing—even some core bank
systems might be more effectively managed by others. As banking leaders contemplate their next move, they would do
well to examine their business for activities that might be shifted to others, help-
Who will buy? The slack will likely be taken
ing them accelerate the transition to the
up by incumbents growing their market
chosen business model.
share—if regulators agree. Governments in
many countries have resisted consolida-
Executing the strategy
tion, reasoning that banking power is al-
With a strategy chosen and a fit con-
ready too concentrated, and the
firmed, banks can then develop a change
accumulation of capital and risks in big
program, drawing on those triple-transfor-
banks makes them difficult to wind down
mation levers that will lift the bank’s per-
in the event of failure. To that end, a major
formance. As a case in point, consider the
thrust of financial reform has been to pro-
program in which many banks will need to
vide for effective resolution of failed banks.
go back to basics. Such a program is
Regulators have a tricky balancing act: the
likely to feature a relentless attack on
Breakaway: How Leading Banks Outperform Through Differentiation
costs. But to round out the economic
next several years. What follows is not a
transformation, more will be needed:
single-point prediction of the future;
banks will have to make tough decisions
rather, it is an illustration of how the in-
to develop a coherent, integrated platform
dustry could evolve from its currently
that can allow the bank to move down the
stagnating performance to a better and
industry cost curve. And they will have to
sustainable structure.
simplify their roster of products, and those
products’ prices, reducing their complexity and cost. Risk taking will have to shift
toward “vanilla” risks that are easily understood and transferred.
From the industry’s perspective, the most
important result would be better economics. Consider a scenario in which overcapacity is mostly eliminated, with half of the
underperforming banks in the top 500 ac-
The transformation of the business
quired by better performers. For the in-
model, for these would-be basic banks,
dustry as a whole, ROE could return to 12
should include the elimination of unnec-
percent or more (Exhibit 14, page 48).
essary “bells and whistles” in their serv-
Risk-adjusted banking revenues might
ice; in their core businesses, most
once again grow slightly faster than GDP
service resolution should be automated.
as banks manage their underwriting more
They will have to consider divesting units
carefully. Margins might rise to 3.5 per-
that don’t square well with a basic ap-
cent on average, a bit better than the cur-
proach: a retail business serving the af-
rent 3 percent.
fluent in a noncore market would be a
prime candidate for disposal.
In such a scenario, the industry would be
more stable, too, with most or all banks
The cultural transformation would likely
earning better than their cost of capital.
include the strengthening of a top-down
That in turn would benefit other stake-
decision-making model, with only limited
holders. Investors would of course like
discretion and authority at the front line.
the higher returns; in a virtuous circle,
Risk limits and other rules will need to be
that will probably lower banks’ cost of
strictly enforced. And compensation
equity. Governments would be pleased;
must be structured to attract people who
rock-solid banks are more likely to lend,
are suited to delivering the bank’s basic
boosting economic growth, and less likely
products—fewer rocket scientists and
to get into trouble and require a costly in-
more people who want to sell mortgages
tervention. Banks’ clients would enjoy
and current accounts in a fair and
lower premiums for risk, safer and stead-
friendly manner.
ier returns on investments and savings,
The industry resets
scenario, bank employees would fare less
and greater access to credit. In such a
If the industry takes up the proposed
well; the elimination of excess capacity
agenda in sufficient numbers, we can an-
inevitably means that jobs will be lost—a
ticipate several positive results over the
troublesome prospect, as it is unlikely
47
48
Breakaway: How Leading Banks Outperform Through Differentiation
Exhibit 14
Two views of the
industry’s future
reveal stark
differences
Strategic classification of banks in 2020
Percent
An inertia scenario
Banks with clear distinctive strategy stay the
course; banks with a 2012 P/B>1 but
ROE<COE relegated to underperformers
A healthy industry scenario
Full business-model transformation, 20% of
banks (50% of underperfomers) are taken over
or merged
100% = 500 banks
100% = 400 banks
1%
Growth-market
leader
Balance-sheet-light
investment specialists
Distinctive customer
franchise
3%
2%
20%
4%
5%
5%
54%
Back-to-basics
4%
Performing with the
market
25%
7%
62%
Global at-scale
universal
13%
Underperforming
18%
21%
30%
Source: Thomson Reuters, McKinsey Global Banking Pools
Exhibit 15
These changes
can return the
industry to a
sustainable ROE
of 12-plus
percent
System ratios1 in an inertia scenario
Percent
System ratios1 in a healthy industry scenario
Percent
~80
~12-13
~30
~6-7
~3.5
~3
~2
~2
~1
-1
ROE 2
Margin
Revenue
growth
minus GDP
C/A
Share of
banks with
sustainable
ROE
ROE 3
Revenue Margin
growth
minus GDP
C/A
Share of
banks with
sustainable
ROE
1
Changes in system ratios are assumed to be driven by reallocation among the different categories.
2
Additional global assumptions: LLP to assets, one-offs recover to pre-crisis level; 15% decline in leverage; 5% improvement in cost-to-assets; 5% decline in margins
3
Additional global assumptions: LLP to assets, one-offs recover to pre-crisis level; 15% decline in leverage; 5% improvement in cost-to-assets
Source: McKinsey Global Banking Pools
Breakaway: How Leading Banks Outperform Through Differentiation
that other industries could provide suit-
looking for opportunities to sell noncore
able opportunities for job seekers. Those
businesses at premium prices, or to build
workers that remain with banks, however,
skills in risk management and managing
would likely have more career options,
complexity; or both.
steadier compensation, and more predictable career paths.
Banks that are currently market performers or underperformers have their own
Exhibit 15 lays out the banking landscape,
traps to avoid. Many will be tempted by
should it evolve in the ways described
the distinctive-customer-franchise strat-
above.
egy; its combination of ROE and growth
■
■
■
potential make it tantalizing. But leading
banks can make this strategy seem
Top banks need to be particularly mindful
easy, when in fact it is exceptionally diffi-
of two pitfalls. The growth-market-leader
cult to pull off. The back-to-basics ap-
strategy is only as good as the markets
proach is ultimately where most
providing the growth; there will undoubt-
struggling banks will find success.
edly be more of these, but it is an open
Banks that get caught in these traps are
question whether the next phase of
more likely to be among the 20 percent
macroeconomic growth will be as strong
of institutions worldwide that, in our esti-
as the last one. And global universals will
mate, may become acquisition targets in
need either a smart retrenchment plan,
the next several years.
Sandra Boss
Miklos Dietz
Fritz Nauck
Aditya Sanghvi
Rob Lentz
The authors would like to acknowledge the contributions of Kate Armstrong,
James Hoffman, and Ben Margolis to this report.
Global Banking Pools: Krisztina Bákor, Jay Datesh, Attila Kincses, Máté Préda
49
50
Breakaway: How Leading Banks Outperform Through Differentiation
Appendix
Definition of metrics
1. Revenues. Total customer-driven revenue pools after risk costs
2. Cost-to-income ratio. Operating expenses/total revenue pools before annual provisions for loan losses
3. Return on equity (ROE). Total accounting net income after taxes/average common equity
4. Capital ratio. Tier-one ratio, calculated as tier-one capital/risk-weighted assets
5. Loan-to-deposit ratio, Total nonsecuritized customer-lending volumes/total customer-deposit volumes
6. (Revenue) margin. Revenues before risk cost/total assets
7. Credit-default-swap (CDS) spreads. Used as a measure of perceived risk of the banking sector (in basis points)
8. Market multiples. Measured as the weighted average of individual banks’ price-to-book (P/B) and price-toearnings (P/E) ratios within a specified country or region
Databases used in this study
We used two primary databases.
Global Banking Pools (GBP). A proprietary McKinsey asset, Global Banking Pools is a global banking database,
capturing the size of banking markets in 69 countries from Angola to the United States, across 56 banking products (with 7 additional regional models covering rest of the world). The database includes all key items of a profitand-loss income statement, such as volumes, margins, revenues, credit losses, costs, and profits. It is developed
and continually updated by more than 50 McKinsey experts around the world who collect and aggregate banking
data from the bottom up. The database covers the client-driven business of banks, while some treasury activities
such as asset/liability management or proprietary trading are excluded. It captures an extended banking landscape
as opposed to simply summing up existing bank revenues, including not only activities of traditional banks but also
of specialist finance players (for example, broker/dealers, leasing companies, and asset managers). Insurance
companies, hedge funds, and private-equity firms are excluded. The data covered for each country refer to banking business conducted within that region (for example, revenues from all loans extended, deposits raised, trading
conducted, or assets managed in the specific country). The data cover 12 years in the past (2000 to 2011) and 9
years of forecasts (2012E to 2020).
Thomson Reuters banking. A database of the key profit-and-loss, balance-sheet, and other financial metrics of
the top 500 banks by market capitalization, sourced from Thomson Reuters. All banks are clustered individually
into countries (based on their domicile), regions, and specific bank types (based on a classification of 14 different
bank types). The data cover 13 years (2000 to 2012), with a varying number of banks available in different years.
For price-to-earning (P/E), price-to-book (P/BV), and ROE aggregations, we used an extended sample of over
1,500 banks worldwide, again sourced from Thomson Reuters.
Additionally, we used data from a range of other sources (including the Organization for Economic Co-operation
and Development, the European Central Bank, and Bloomberg) to populate various indicators.
51
Breakaway: How Leading Banks Outperform Through Differentiation
2012 Country Financial Statistics
$ billion
Region
Country
Stock values and volumes
Financial
depth/GDP
Market
capitalization
Cross-border capital flows
Government
debt securities
Private
debt1
Non-securitized
loans
Inflows
Outflows
Western Europe
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Netherlands
Norway
Portugal
Spain
Sweden
Switzerland
United Kingdom
329%
370%
600%
325%
373%
299%
359%
984%
350%
623%
333%
473%
459%
467%
468%
524%
106
300
225
159
1,823
1,486
45
109
480
651
253
66
995
561
1,079
3,019
257
464
162
117
2,049
2,178
141
119
2,183
438
104
164
972
166
112
2,224
384
272
759
164
2,484
2,178
97
1,203
1,711
1,899
432
231
1,452
610
465
3,454
562
631
738
373
3,314
4,230
567
563
2,403
1,438
879
490
2,517
1,121
1,306
3,456
-10
-68
9
51
82
182
63
47
14
-100
18
-6
45
43
116
-59
-3
-67
34
32
-38
461
56
42
7
-13
130
-4
55
68
225
-88
Americas
Argentina
Brazil
Canada
Colombia
Mexico
Peru
United States
53%
189%
354%
144%
135%
112%
464%
34
1,230
2,016
262
525
97
18,668
102
1,436
1,288
109
386
27
14,042
40
856
812
14
292
19
20,872
76
1,004
2,319
143
383
80
9,298
12
115
183
20
84
13
416
8
59
120
9
58
20
13
Asia Pacific
Australia
China
Hong Kong
India
Indonesia
Japan
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Vietnam
372%
225%
638%
184%
105%
473%
383%
398%
205%
402%
357%
280%
149%
1,286
3,697
1,108
1,263
397
3,681
1,180
476
264
414
735
383
33
569
1,287
95
804
137
10,556
419
151
111
117
177
101
14
1,446
2,500
166
184
36
4,036
1,024
228
18
178
161
196
14
2,428
10,992
309
1,106
349
9,953
1,803
352
119
402
617
343
145
85
334
151
71
41
298
32
-7
11
73
-51
42
14
56
451
158
24
16
355
79
-10
14
112
73
36
5
CEE
& CIS
Croatia
Czech Republic
Hungary
Poland
Romania
Russia
Slovakia
Slovenia
Turkey
Ukraine
217%
162%
255%
190%
103%
116%
140%
194%
138%
87%
22
37
21
178
16
875
5
6
309
21
17
80
82
252
11
157
43
22
268
16
4
56
35
67
1
279
5
4
30
5
81
143
186
431
147
1,030
76
56
487
111
0
12
-9
19
2
108
0
0
69
16
0
10
-2
12
-1
166
0
2
23
2
Middle East and
Africa
Angola
Egypt
16%
93%
124%
156%
48%
97%
296%
131%
N/A
58
97
53
56
373
612
68
N/A
N/A
N/A
N/A
1
3
100
56
15
94
118
91
66
300
274
336
2
6
-7
6
11
12
24
12
5
-3
42
0
8
135
6
2
Kuwait
Morocco
Nigeria
Saudi Arabia
South Africa
United Arab Emirates
1
N/A
87
N/A
N/A
151
10
Includes all corporate and financial bonds, as well as securitized loans; excludes non-securitized loans
Note: Numbers enclosed here are preliminary as of September 2013. Due to revisions in source data and methodological improvements, our 2011 base data may have changed since our 2012 report. For further details please feel free
to contact us at [email protected]
52
Breakaway: How Leading Banks Outperform Through Differentiation
2012 Banking Markets
$ billion
Region
Country
Banking revenues and profitability
Revenue
margin1
Revenue
pools 2
Cost-toincome ratio
Profit
pools 3
Risk cost
ratio 4
Loan-todeposit ratio 5
Western Europe
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Netherlands
Norway
Portugal
Spain
Sweden
Switzerland
United Kingdom
1.3%
1.0%
1.3%
0.9%
1.0%
1.1%
2.3%
1.0%
1.6%
0.8%
1.2%
1.6%
1.8%
1.2%
0.8%
1.1%
14.4
17.0
18.0
7.8
81.5
133.7
(14.6)
1.5
75.2
31.0
12.7
8.2
9.0
20.7
38.4
139.8
49%
66%
39%
53%
63%
67%
53%
50%
54%
52%
49%
54%
37%
48%
56%
50%
4.1
2.5
7.7
2.5
12.9
25.4
(21.6)
(4.3)
10.7
7.8
4.3
0.7
(27.2)
7.2
12.0
39.9
0.7%
0.4%
0.2%
0.2%
0.5%
0.2%
7.5%
2.1%
1.3%
0.4%
0.2%
1.1%
2.5%
0.2%
0.2%
0.6%
151%
110%
306%
221%
140%
107%
315%
288%
112%
139%
285%
165%
123%
339%
139%
102%
Americas
Argentina
Brazil
Canada
Colombia
Mexico
Peru
United States
7.4%
6.9%
1.3%
4.7%
3.5%
6.6%
1.3%
15.3
204.2
99.2
18.1
34.1
10.0
860.3
57%
54%
60%
46%
50%
56%
57%
3.5
42.2
27.3
5.4
8.2
2.7
185.4
1.4%
4.3%
0.2%
1.8%
2.1%
1.0%
1.0%
58%
147%
106%
114%
121%
145%
86%
Asia Pacific
Australia
China
Hong Kong
India
Indonesia
Japan
Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Vietnam
1.2%
2.3%
1.2%
1.8%
4.7%
0.9%
1.8%
1.6%
2.1%
1.2%
1.1%
3.2%
2.7%
90.2
553.3
28.4
56.2
37.5
258.0
60.9
17.7
6.0
20.7
20.8
28.6
2.4
38%
38%
36%
47%
55%
64%
35%
58%
53%
52%
58%
51%
34%
37.2
232.1
14.1
26.7
10.8
42.5
25.4
4.8
1.7
6.4
5.5
9.7
(0.3)
0.2%
0.5%
0.3%
0.4%
0.9%
0.3%
0.9%
0.4%
0.4%
0.4%
0.4%
0.7%
2.8%
153%
73%
30%
78%
105%
75%
131%
112%
87%
55%
105%
118%
97%
CEE
& CIS
Croatia
Czech Republic
Hungary
Poland
Romania
Russia
Slovakia
Slovenia
Turkey
Ukraine
2.9%
2.9%
3.7%
2.8%
3.6%
4.2%
3.2%
3.1%
4.7%
6.3%
2.7
8.3
4.8
18.9
4.5
75.8
3.6
1.2
33.5
5.2
37%
46%
57%
51%
67%
52%
43%
42%
35%
54%
1.2
2.9
(0.8)
6.4
0.1
23.2
1.3
(0.0)
16.2
(2.3)
1.0%
1.1%
2.9%
0.7%
1.7%
1.0%
1.5%
3.0%
1.0%
6.4%
212%
96%
270%
169%
225%
107%
158%
174%
127%
114%
Middle East and
Africa
Angola
Egypt
5.1%
2.2%
1.3%
2.3%
6.9%
2.4%
1.8%
2.1%
1.7
4.1
10.2
3.4
8.3
13.7
19.2
8.6
42%
71%
36%
88%
64%
39%
61%
38%
0.6
(0.2)
6.0
(0.2)
1.7
7.2
3.5
3.5
0.6%
1.5%
0.8%
0.7%
0.9%
0.8%
0.7%
1.0%
52%
53%
91%
140%
78%
89%
84%
109%
Kuwait
Morocco
Nigeria
Saudi Arabia
South Africa
United Arab Emirates
1
Calculated as total customer-driven revenue pools before provisions for loan losses/total customer driven volumes (at average of period) as it is available in Global Banking Pools
Revenue pools after provisions for loan losses
3
Profit pools after tax
4
Loan loss provisions/total retail and wholesale loan volumes (at average of period)
5
Calculated as non-securitized loans/deposits (at end of period)
Note: Numbers enclosed here are preliminary as of September 2013. Due to revisions in source data and methodological improvements, our 2011 base data may have changed since our 2012 report. For further details please feel free to
contact us at [email protected]
2
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Contact
For more information about this report, please contact:
Sandra Boss
Director
London, UK
[email protected]
Aditya Sanghvi
Miklos Dietz
Director
Budapest, Hungary
[email protected]
Rob Lentz
Associate Principal
Charlotte, NC USA
[email protected]
Fritz Nauck
Director
Charlotte, NC USA
[email protected]
Principal
New York City, USA
[email protected]
Financial Services Practice
November 2013
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