December 24, 2022 / VOLUME NO. 241

Pushing the Envelope

2022 is coming to a close, and wasn’t it great for banking? It was the most profitable year for the industry globally in 14 years, with an expected return on equity of 11.5% to 12.5%, according to a December report by consulting firm McKinsey & Co. The firm analyzed banks globally with assets of at least $8 billion. 

Capital levels are high. And interest rates are rising, a key driver of profitability after years of low rates. Despite all this, it’s sobering to consider how poorly the world’s investors view the banking industry. According to McKinsey Senior Partner Miklós Dietz, banking had the lowest valuations of any economic sector in the first half of 2022. The global banking industry traded below book value during that time frame: 0.8x on average, below the second lowest valued sector, utilities, at 1.5x. Global banks were dragged down by economic problems, particularly in Europe and China; banks in the United States had a better average at 1.2x price to book. And as of Dec. 19, Bank of America Corp. was trading at 1.06x, JPMorgan Chase & Co. was at 1.49x, and Citigroup was 0.48x, according to research firm Morningstar.

But U.S. banks aren’t immune to some of the pressures facing banks worldwide. Traditionally, banking is viewed as a capital-intensive business, which hurts its valuation. Still, that doesn’t account for such dismal valuations. Sure, investors are worried about the future of the economy, and that comes into play. But a lack of optimism about the growth prospects of the world’s banks is a major factor, Dietz says. 

Going forward, investors think half the banks in the world won’t generate enough returns to justify their cost of capital — a big disappointment if you’re an investor. He thinks banks in the U.S. have made huge inroads to digitize and meet customer needs, but more must be done. With profitability improving, banks should be reinvesting in digitization that will help them remain competitive in the years ahead. “Banks have a window of opportunity to use this oxygen to reinvent their business model,” Dietz says. “Take a more global perspective. Identify the banks who truly escape gravity, and let’s try to push the envelope.” 

Naomi Snyder, editor-in-chief of Bank Director

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