Tuesday 22 October 2019 1:00 am

Bottom third of banks facing 'do or die' moment, report warns

More than a third of banks across the world must merge with rivals or radically restructure in order to survive any future downturn, according to a new report out this morning.

Flattening yield curves, weakening consumer confidence and slowing growth in volumes and top-line revenues all pose a “do or die” moment for a large segment of the world banking industry, management consultancy McKinsey has warned.

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Roughly 35 percent of banks globally have earned an average 1.6 per cent return on tangible equity – a key measure in the industry – over the past three years, leading McKinsey analysts to classify them as “challenged banks”.

The report concluded that the so-called challenged banks are “at their last pit stop to rapidly reinvent business models” and suggested that mergers of similar-sized groups was one possible route for survival among some.

The report said: “Growth in volumes and topline revenues is slowing with loan growth of just four percent in 2017/18 – the lowest in the past five years and a good 150 bps below nominal GDP growth.”

Digital disruption coupled with mounting economic uncertainty has taken its toll on banks internationally during the last year.

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“Given where many players in the banking industry are today, a serious downturn could be catastrophic for many. This is a ‘do or die’ moment,” said Chira Barua, London-based McKinsey partner and co-author of the report, which analysed over 1,000 banks globally.

Barua added: “While imaginative institutions are likely to come out leaders in the next cycle, others risk becoming footnotes to history.”

Possible mergers have been speculated as one possible solution to the current financial troubles within Europe’s banking sector.

Following years of pressure since the financial crisis, embattled German lender Deutsche Bank and its rival Commerzbank attempted a tie-up earlier this year, but talks ended in failure.

A number of banks, most prominently Deutsche Bank, have looked to slash costs and axe jobs as a way of shoring up the balance sheet in recent months.