The capital markets giants often suffer from fragmented structures with units in different countries communicating poorly across borders, or sales teams too focused on one product line without being aware of the rest of the business, the report said.
If these problems are not addressed, return on equity could plunge from an average of 10 per cent over the last year to around four per cent by 2019.
That is well below the cost of capital, which comes in at around 11 to 13 per cent, and means the firms risk becoming unsustainable.
McKinsey fears recent drives to cut costs are far too little to make a real difference.
“With compensation accounting for over 40 per cent of total costs this is a critical line item, in terms of both headcount and pay levels,” the report said.
And McKinsey said the reforms are even more urgent because the banks’ current earnings are being propped up by policy support, which the Bank of England and Federal Reserve are planning to remove very gradually.
“When the era of ‘free’ money from central banks draws to a close, these banks will see a significant decline in profitability,” the analysts warned.