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McKinsey’s Global Banking Annual Review 2020: A test of resilience

McKinsey & Company | Mark Staples | Dec 9, 2020

mckinsey global banking - McKinsey’s Global Banking Annual Review 2020: A test of resilienceAs the COVID-19 pandemic rolls on, banks must prepare for a long winter.

Ten months into the COVID-19 crisis, hopes are growing for vaccines and new therapeutics. But victory over the novel coronavirus still lies some nine to 12 months in the future. In the meantime, second and third waves of infection have arrived in many countries, and as people begin to crowd indoors in the months ahead, the infection rate may get worse. As a result, the potential for near-term economic recovery is uncertain. The question of the day is, “When will the economy return to its 2019 level and trajectory of growth?”

Our research finds that in the months and years to come, the pandemic will present a two-stage problem for banks (Exhibit 1). First will come severe credit losses, likely through late 2021; almost all banks and banking systems are expected to survive. Then, amid a muted global recovery, banks will face a profound challenge to ongoing operations that may persist beyond 2024. Depending on scenario, from $1.5 trillion to $4.7 trillion in cumulative revenue could be forgone between 2020 and 2024. In our base-case scenario, $3.7 trillion of revenue will be lost over five years—the equivalent of more than a half year of industry revenues that will never come back.

Credit losses: Bend but don’t break

To curb the spread of the virus, societies around the world have attempted the heretofore unimaginable: they have shut their economies, twice in some cases, throwing tens of millions of people out of work and closing millions of businesses. Those people and businesses are banks’ customers, and their inability to keep up with their obligations will sharply increase personal and corporate defaults.


In anticipation, global banks have provisioned $1.15 trillion for loan losses through third quarter 2020, much more than they did through all of 2019 (Exhibit 2). Banks have not yet had to take substantial write-offs; their forbearance programs and significant government support have kept households and companies afloat. But few expect this state of suspended animation to last. We project that in the base-case scenario, loan-loss provisions (LLPs) in coming years will exceed those of the Great Recession.

Revenues: More than $3 trillion forgone

In the second phase, impact will shift from balance sheets to income statements. In some respects, the pandemic will only amplify and prolong preexisting trends, such as low interest rates. But it will also reduce demand in some segments and geographies. On the supply side, we expect banks to become more selective in their risk appetite. Of course, there will be offsetting positive effects for the industry, such as a need to refinance existing debt, and some regions and industry segments will still benefit from secular tailwinds. In addition, government support programs should continue to support activity in some places.

covid recovery banks reslience - McKinsey’s Global Banking Annual Review 2020: A test of resilience


A test of resilience: Restoring short-term economics

Banks responded extraordinarily well to the first phases of the crisis, keeping workers and customers safe and keeping the financial system operating well. Now they need equal determination to deal with what comes next by preserving capital and rebuilding profits. We see opportunities on both the numerator and denominator of ROE: banks can use new ideas to improve productivity significantly and can simultaneously improve capital accuracy.

Read:  Cambridge Centre for Alternative Finance and World Bank – Study COVID Crisis and Impact on Fintech Regulation

In our view, banks can use six moves to wring more productivity out of their operations. Here we consider just one of those six: speeding up the shift to digital banking that many customers are already making and reconfiguring the branch network, where demand has softened. In the past year, the use of cash and checks—core transactions for branches—has eased; in most markets, about 20 to 40 percent of consumers report using significantly less cash. In the meantime, customer interest in digital banking has jumped in many markets, although this trend varies widely. In the United Kingdom and the United States, only 10 to 15 percent of consumers are more interested in digital banking than they were before the crisis (and 5 to 10 percent are less interested). In Greece, Indonesia, Mexico, and Singapore, the “more interested” share ranges from 30 to 40 percent.

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