Banks build capital, see investors favor others

The global banking industry built up capital and showed its stability during the pandemic but its return on equity plunged and it has lost favor with investors to industries with more attractive growth prospects, according to a new study.

“Banks withstood the pressures of 2020, and capital reserves rose last year. But it came at a cost,” consulting firm McKinsey said on Wednesday in its annual banking review.

Return on equity for banks in North America fell to 8% in 2020 from 12% in 2019 and halved for European banks to 3% from 6%.

“The industry became safer, more predictable, more commoditized,” the report said.

Investors now value banks as though they were utilities. Banks trade around 1.0 times book value compared with 3.0 times for all other industries, the report said. The discount was less a decade ago, about 1.0 times versus 2.0 times.

The disparity comes even after the industry’s stock market value increased 20% to October 2021 from the month before the pandemic.

That reflects a banking outlook that is “decent and resilient, but not attractive,” said McKinsey.

Return on equity could increase from 6% to between 7% and 12% in 2025, largely depending on changes in interest rates, government economic support and how much cash is piled onto balance sheets.

The banks that will fare better than peers, the consultants said, will be those that move quickly toward businesses that earn fees and require less capital, such as payments, wealth management and investment banking.

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