What’s in store for global
banking
Banking around the world may now be passing through a major cyclical
correction, but McKinsey research suggests that the industry’s revenues and profits
will double by 2016.
Miklos Dietz, Robert Reibestein, and Cornelius Walter
j a n u a r y 2 0 0 8
Global banking may be passing through a major cyclical correction at the end of 2007, but new
McKinsey research suggests that in the longer term the industry’s revenues and profits—
poised to continue growing faster than the rate of GDP growth—will double by 2016.
The historical part of the analysis, which examines global data from 2000 to 2006, reveals a
rich mosaic of regional, national, and product diversity. There is little global convergence:
different factors seem to drive different markets, which have surprisingly varied structures and
uneven growth patterns.
In 2016, the market capitalization of banks will likely be $12 trillion higher than it is today. As
consolidation in the sector accelerates, winners will be able to outmaneuver their competitors
by developing a deep, bottom-up understanding of the idiosyncrasies of markets
and by understanding the vital importance of being in the right place at the right time.
b a n k i n g
Article
at a
glance
2
With the midsummer credit crunch taking its toll, 2007 turned into a bleak
year for the world’s big financial institutions, and 2008 may not be much better. As
executives respond to the immediate pressures, however, they should maintain a clear
perspective on the long-term outlook, which in our view is considerably brighter. Despite
the current correction, we believe that during the next ten years the growth rate of the
global banking industry will exceed that of GDP. Driven by powerful basic trends, such
as demographics and the math of wealth accumulation, the industry will likely more
than double its revenues and profits over the period.
Just as strikingly, McKinsey research also indicates that the industry’s patterns of
growth will be diverse and uneven. Our comprehensive analysis of data since 2000
suggests that banking is one of the global economy’s few large industries that isn’t
rapidly converging around a single structure or following the same market dynamics
everywhere. Indeed, banking’s revenue performance has varied sharply and unexpectedly
within regions, countries, subsectors, and product groups—and will continue to do so.
More than in other major industries, it appears, long-term success in banking hangs on
being in the right place at the right time. Over the last ten years, for example, 88 percent
of the growth in the revenues of Europe’s 20 largest banks was attributable to market
momentum—in other
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s, competing in or entering territories and market segments
that enriched everybody. Moreover, timing is critical. Buying into retail-banking markets
across Asia in 2000 would have destroyed value over the next four years, as falling stock
market multiples more than offset revenue growth. Buying into them in 2004, however,
would have been richly rewarding.
In the text and exhibits that follow, we explore the global banking industry’s rich mosaic
and highlight some of the core characteristics identified by our research. Our conclusions
offer bank strategists and other senior executives a more detailed understanding of the
size and composition of different banking markets, as well as insights into future
profit trends.
3
Big and getting bigger
The industry with the largest profits . . .
In 2000, the global banking industry’s future looked decidedly downbeat: the
Internet was widely expected to compress margins, thus disintermediating or even
commoditizing many parts of the business. Banks mostly missed out on the stock
market upturn that followed the dot-com debacle, though their empty M&A
pipelines were partly to blame.
In retrospect, the gloom proved unwarranted. Global after-tax profits for banks soared
to a historic high: from $372 billion in 2000 to $788 billion in 2006, or $672 billion in
constant dollars. Along the way, banking became the industry with the highest absolute
level of profits (Exhibit 1). In fact, those of US banks alone—$328 billion in 2006—were
larger than the combined profits of the retailing, pharmaceutical, and automotive
industries around the world. What’s more, in that year the banking industry’s profits per
employee were estimated to be 26 times higher than the average of all other industries,
and its $2.8 trillion in revenues equaled 6 percent of the global GDP.
. . . is set to double its revenues and profits by 2016
The recent stellar performance of the banking industry has, however, proved
unsustainable in the short term—not surprising, given its cyclical nature. Corrections
inevitably follow peaks, as we have seen from the events of Black Monday (1987) and
the dot-com debacle (2001). That appears to be happening now, and the most recent
estimates put the profit impact in the hundreds of billions of dollars.
Exhibit 1
The profit leader After-tax profits,1 2006, $ billion
Web Ex 2008
Banking profit pools
Exhibit 1 of 6
Glance: Banking has become the industry with the highest absolute profits.
Exhibit title: The profit leader
1Data for banking based on global banking pools data. Data for machinery, equipment, and components; metals and mining;
and telecom and IT services based on sample of >2,000 companies. Data for beverages and food products; chemicals;
media and publishing; oil, gas, and coal; retailing; and transportation based on sample of 1,000–2,000 companies. Data
for automotive, insurance, pharmaceuticals, semiconductors, and utilities (electric, gas, water) based on sample of
500–999 companies.
Source: Company annual reports; Datamonitor; Reuters Knowledge; Standard & Poor’s; McKinsey analysis
Banking 788
Oil, gas, and coal 617
Metals and mining 285
Telecom and IT services 250
Insurance 233
Utilities (electric, gas, and water) 231
Pharmaceuticals 137
Beverages and food products 122
Transportation 107
Machinery, equipment, and components 90
Chemicals 86
Retailing 85
Automotive 84
Media and publishing 59
Semiconductors 41
4
While short-term movements are highly uncertain, the underlying long-term trends,
we believe, are encouraging. The industry’s upward path should resume in due course
thanks to demographic trends, wealth accumulation patterns, financial innovation, the
rapid development of energy markets, and globalization.
Exhibit 2 shows that whatever happens in the next one or two years, global banking
profits, as a proportion of total corporate profits, will probably remain at or above
their historical high on a ten-year view. Furthermore, our base-case scenario indicates
that global banking revenues will grow, on average, by a healthy 7.5 percent a year
from 2006 to 2016, compared with an average of 8.0 percent a year from 2000 to
2006 (and 12.6 percent from 2002 to 2006). Although our ten-year projections show
annual growth rates for revenues slowing somewhat, they still exceed current forecasts
for GDP growth by more than one-half of a percentage point a year over the period.
Consequently, we expect the industry to generate $5.7 trillion in revenues and
$1.8 trillion in after-tax profits by 2016—more than twice the levels at the end of 2006.
Looking ahead, we project that emerging markets will contribute roughly half of the
absolute growth in new banking revenues from 2006 to 2016, while North America and
Western Europe will account for 25 and 20 percent, respectively. Russia, we believe, will
continue to be one of the fastest-growing large markets in the next few years, and China
will maintain its recent accelerated growth rates. In the next tier, certain other Asian
countries, especially India, will overtake the countries of Central and Eastern Europe.
Exhibit 2
A historic high Global banking profits as % of total global corporate profits1
Web Ex 2008
Banking profit pools
Exhibit 2 of 6
Glance: Banking has become the industry with the highest absolute profits.
Exhibit title: A historical high
1Global corporate pro�ts estimated using global gross economic-surplus data, less depreciation and taxes—ie, average tax
rates in member countries of Organisation for Economic Co-operation and Development (OECD) weighted for GDP, with
estimates for 1970–80 and 2007–16.
2Estimated based on trends, predominantly using banking data in key global markets.
3Based on projected growth of global banking pools and global GDP.
Source: Banca d'Italia, Banco de Espana, Banco de Portugal, Bank of Korea, Banque de France, British Bankers' Association;
Deutsche Bundesbank; Global Insight; Japan Bankers Association; US Federal Deposit Insurance Corporation (FDIC);
McKinsey analysis
1970
0
2
4
6
8
10
9
11
1975 1980 1985 1990 1995 2000 2005 2010 2015 2016
1
3
5
7
Estimated2 Actual Forecast3
5
In the world as a whole, we expect the growth rates of retail assets and credits to
converge as a result of the savings of the emerging middle classes of Asia, Central
Europe, and Eastern Europe. Wholesale banking will probably undergo some
restructuring in the next ten years, with investment banking, as well as sales and trading
and securities services, providing a larger relative share of the revenues.
Diverse and likely to remain so
The growth of products and countries
Our analysis of the historical data highlights the striking diversity of banking around
the world—something we expect to continue for the foreseeable future. Consider the
growth patterns of specific countries. We find that revenues in developed ones not only
accounted for the bulk of all banking revenues in absolute terms from 2000 to 2006
but also, excluding Japan, grew significantly faster than revenues in the world as a
whole, in part thanks to the appreciating euro (Exhibit 3). The “BRIC” countries (Brazil,
Russia, India, and China) were responsible for only 14 percent of the absolute global
revenue growth in the six years to 2006, notwithstanding the drumbeat of expectations
about growth in emerging markets during that period.
Exhibit 3
Patterns vary
Top of sand background
Baseline for unit of
measure/subtitle
Distribution by region, %1
Web Ex 2008
Banking profit pools
Exhibit 3 of 6
Glance: Developed countries still account for the bulk of banking activity.
Exhibit title: Patterns vary
1Figures may not sum to total percentages, because of rounding.
2Revenues in developed countries grew signi�cantly faster than revenues in world as a whole, in part because
of the appreciating euro.
3After cost of risks.
4Measured in US dollars.
5Excludes offshore private banking (~$20 billion).
13
North America
100% =
Western Europe
Japan, Australia
Eastern Europe
Latin America
Middle East, Africa
Emerging Asia
Population,
2006
9
18
54
6,433
million
6
Absolute GDP
growth,
2000–06
8
8
18
$16.4
trillion
24
36
GDP, 2006
11
6
13
$48.1
trillion
30
30
Absolute banking
revenue growth,3
2000–06
12
$1.1
trillion
44
26
Banking
revenue,3
2006
10
$2.8
trillion
41
80%
25
4
5
2
4
1
5 4 5
5
5
5 5
Compound annual growth rate (CAGR) of revenues after
costs of risks,4 2000–06, %
Global pool5 = 8.3
Developed countries,2
including Japan
7.5
Developed countries,2
excluding Japan
9.0
5
Developed countries2
Emerging countries
2
6
A look at growth rates presents a mixed picture, since Ireland, Russia, and Thailand
posted some of the strongest results among individual countries. Interestingly, we found
that from 2000 to 2006, banking revenues in Greece grew more rapidly than those in
China; India was outpaced by Australia, and Latin America by the United States. At
the same time, several markets—including Argentina (at –60 percent), Taiwan, and
Turkey—suffered an absolute overall decline in revenues.
Growth also varied markedly by product category. In retail banking, for example,
mortgages and asset management delivered double-digit growth from 2000 to 2006 in
the world as a whole, while retail brokerage and deposits increased more slowly than
inflation did.
Business mix
The mix of banking business in countries and regions varied significantly, we found,
even among those at similar levels of economic development (Exhibit 4). On the one
hand, retail banking represented a steady 60 to 70 percent of all revenues in most
markets around the world from 2000 to 2006, but wholesale banking accounted for at
least half of the industry’s revenues in China, Hong Kong, Indonesia, Russia, and South
Africa. On the other hand, Canada, Egypt, Japan, Pakistan, and South Korea rank
among the world’s most retail-driven markets.
Exhibit 4
No uniform mix
Top of sand background
Baseline for unit of
measure/subtitle
Banking revenue structure by country, 2006
Web Ex 2008
Banking profit pools
Exhibit 4 of 6
Glance: The mix of banking business in different countries or regions varied significantly.
Exhibit title: No uniform mix
1Retail asset–related revenues—eg, deposits, investments, insurance distribution, transactions.
2Retail liability–related revenues—eg, mortgages, consumer �nance.
3Includes investment banking, sales and trading, securities services.
4Corporate assets and liabilities.
Retail revenue as %
of total revenue
Breakdown of
retail revenue
pool, %
Breakdown of
wholesale
revenue pool, %
Most important/
highest-growth products
United States
63
6238
4753
t Credit cards
t Mortgages
Japan
80
24
76
91
9
t Corporate
loans
Brazil
68
75
25
82
18
t Consumer
finance
Germany
64
29
71
59
41
t Transactions
Russia
27
59
41
60
40
t Point-of-sale
(POS) loans
Turkey
58
31
69
12
88
t Credit
cards
Personal financial
assets1
Personal financial
liabilities2
Capital markets3
Corporate banking4
Further, the mix of businesses within retail banking also varied widely. In the United
States, almost two-thirds of retail revenues in 2006 came from mortgages and consumer
finance—the two elements of personal financial liabilities—though this will probably
change after the crisis of mid-2007. In Western Europe, such products generally
accounted for a little over one-third of all revenues. The differences among emerging
markets are also noteworthy: Brazil and Ukraine seem to rely on retail lending more
than the United States does, while many Asian countries tend to follow the pattern of
Western Europe. To take one product, in 2006 the share of credit cards in total retail
revenues ranged from 23 percent in Turkey to just over half a percent in Germany; the
global average was 7 percent.
Wholesale banking is similarly diverse. In 2006, only 30 percent of US wholesale-
banking revenues came from lending to and deposits from large corporations and small
and midsize enterprises, 47 percent from corporate banking as a whole. In the United
States, investment banking, asset management, and related revenues towered over
everything else. In most other countries, however, corporate banking accounted for at
least half of all revenue pools in wholesale banking—91 percent in Japan, 88 percent in
Turkey, and 74 percent in Latin America, for example. Notably, these ratios have stayed
remarkably constant over the past six years.
7
Growth drivers
Banking may be a leveraged bet on the economy, but the extent of the leverage and the
part of the economy on which it is focused vary significantly (Exhibit 5). In addition
to economic cycles, banking is a play on sociodemographic patterns and on trends
in financial accumulation, both often influenced in turn by culture and government
regulation. As became painfully apparent during the summer of 2007, for example, a
big jump in household borrowing was largely responsible for the growth of US retail-
banking revenues from 2000 to 2006—indeed, it explains 70 percent of the increase.
In Germany, however, household borrowing contributed only 4.7 percent of the total
growth of retail revenues from 2000 to 2006; the rest came mainly from new savings
and from returns on existing savings. Germany’s banking revenues increased by
4.9 percent in US dollar terms. As in most other continental European countries, a
strong currency was a key driver.
The impact of demographic and socioeconomic forces was far greater elsewhere. Take
India, where population trends and rising salaries played almost as big a part in the
growth of retail-banking revenues as savings and lending did. Together, all four drivers
more than offset a $4.4 billion decline in deposit margins from 2000 to 2006.
Exhibit 5
Different drivers
Top of sand background
Baseline for unit of
measure/subtitle
Estimated share of retail revenue growth, 2000–06, %
Web Ex 2008
Banking profit pools
Exhibit 5 of 6
Glance: Key drivers of growth in retail-banking revenues differ dramatically across countries.
Exhibit title: Different drivers
1Calculated as weighted average of deposit returns and capital markets investments.
2Personal �nancial assets.
3Personal �nancial liabilities.
Stock-flow
model drivers Germany India
Population growth 0.1 6.4
Change in disposable
income per capita 1.7 23.1
Capitalized returns1 26.1 37.6
New savings 10.9 31.5
Change in PFL3 margins
(including risk cost) –12.0 –2.7
Effect of foreign-
exchange rate
106.2 6.1
Total (after risk)
revenue growth
100% =
$21.8 billion
100% =
$6.4 billion
Compound annual growth
rate (CAGR), 2000–06, %
Main drivers Euro strengthening, as
increase in capitalized returns
and new savings was offset
by margin decline
Capitalized returns on assets
and growth in savings and
indebtedness partially offset
by margin decline
4.9 9.4
Increase in household
indebtedness 4.7 66.8
Change in PFA2
margins
United States
2.4
8.1
2.4
–4.0
14.0
0
100% =
$274.8 billion
Increase in overall indebtedness
and lending products
8.9
70.0
7.1 –37.6 –68.7
8
Capital market multiples
Exhibit 6 calls to mind the fact that the annual growth of a bank’s investment value is
its after-tax profit increase adjusted for changes in market multiples. Regional multiples,
which often change relative to one another in response to investor sentiment, may add to
or detract from an individual institution’s underlying performance.
Such considerations will be significant when banks return in earnest to M&A, as
we believe they will. Our research suggests that the growth in banking revenues and
profits expected during the next ten years should create $12 trillion in new market
capitalization—a huge opportunity for players around the world.
Over the next five years, we expect a new wave of consolidation to speed the emergence
of “superbanks,” with more than $500 billion in market capitalization. Today, however,
global banking is the least concentrated large industry; the top 20 banks account for
less than 40 percent of its global market cap, compared with an average of 67 percent in
other key industries. Even the current top European and US banks aren’t guaranteed to
achieve superbank status with their existing portfolios.
In our view, the winners will outshine their competitors by developing better insights
into the diversity among markets and the nature of the trade-offs between risks and
returns. A superior understanding of the fundamentals that drive value should help
these banks exploit short-term cyclicality to their long-term advantage. Q
Exhibit 6
A multiple effect
We are very thankful to Luis Andrade, Tab Bowers, Christian Casal, Toos Daruvala, Olivier Hamoir, and Stefano Visalli
for their assistance.
Miklos Dietz and Cornelius Walter are principals in McKinsey’s Budapest office; Robert Reibestein is a
director in the Amsterdam office. Copyright © 2008 McKinsey and Company. All rights reserved.
Top of sand background
Baseline for unit of
measure/subtitle
Breakdown of