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Technology Half the World’s Banks Are Too Weak to Survive a Downturn, McKinsey Says

03:10  22 october  2019
03:10  22 october  2019 Source:   bloomberg.com

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(Reuters) - A third of banks globally are unlikely to survive a serious economic downturn and must radically revamp their business models, management consultancy McKinsey said in a report on the industry on Monday. A decade on from the global financial crisis, investor confidence in banks

(Reuters) - A third of banks globally are unlikely to survive a serious economic downturn and must radically revamp their business models, management consultancy McKinsey said in a report on the industry on Monday. A decade on from the global financial crisis, investor confidence in banks

(Bloomberg) -- More than half of the world’s banks are too weak to survive a downturn, according to a survey from consultancy McKinsey & Co.

a tall building in a city: Skyscrapers including the Commerzbank AG headquarters, left, and twin tower headquarters of Deutsche Bank AG, right, stand illuminated at sunrise in the financial district of Frankfurt, Germany, on Monday, Oct. 21, 2019. U.K. Prime Minister Boris Johnson is making a fresh bid to deliver on his promise to take Britain out of the European Union on Oct. 31 amid mounting optimism that he now has the backing to get his deal through Parliament.© Bloomberg Skyscrapers including the Commerzbank AG headquarters, left, and twin tower headquarters of Deutsche Bank AG, right, stand illuminated at sunrise in the financial district of Frankfurt, Germany, on Monday, Oct. 21, 2019. U.K. Prime Minister Boris Johnson is making a fresh bid to deliver on his promise to take Britain out of the European Union on Oct. 31 amid mounting optimism that he now has the backing to get his deal through Parliament.

A majority of banks globally may not be economically viable because their returns on equity aren’t keeping pace with costs, McKinsey said in its annual review of the industry released Monday. It urged firms to take steps such as developing technology, farming out operations and bulking up through mergers ahead of a potential economic slowdown.

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McKinsey ’s 2019 Global Banking Annual Review reveals that struggling banks have one last Imperative: urgency is acute. To survive a downturn , inorganic options seems to only game in town. However, understanding the factors that distinguish between the world ’ s highest and lowest

To survive a downturn , merging with similar banks may be the only option if a full reinvention is not feasible," the report said . McKinsey identified three things banks should do within their own companies to prepare themselves for a possible downturn .

“We believe we’re in the late economic cycle and banks need to make bold moves now because they are not in great shape,” Kausik Rajgopal, a senior partner at McKinsey, said in an interview. “In the late cycle, nobody can afford to rest on their laurels.”

The decade since the global financial crisis has seen a wave of innovation in financial services, bringing new competitors from fintech startups to giants like Apple Inc. and Alphabet Inc.’s Google. Banks have pondered whether to compete with, partner with or acquire some of these newcomers. Some established firms have sought to rebrand as technology companies, in part to attract hard-to-get talent.

McKinsey, whose clients are some of the biggest corporations in the world, consults on topics ranging from strategy and technology to mergers & acquisitions, outsourcing and stock offerings. In its report, the firm said banks risk “becoming footnotes to history” as new entrants change consumer behavior. Most recent attempts by banks to boost efficiency have been “business-as-usual,” it said.

Chip Analysts Say July Sales Data Show the Downturn Isn’t Over

Chip Analysts Say July Sales Data Show the Downturn Isn’t Over Semiconductor companies continue to struggle with weak demand and high inventory levels, analysts wrote, citing the latest month of industry sales data. Total semiconductor sales fell about 15% on a year-over-year basis in July, according to the brokerages, which cited data from the Semiconductor Industry Association. That followed a drop of 17% in June, and May’s 15% decline. The report shows that “we remain deep in a semiconductor downturn,” wrote David Wong, an analyst at Nomura Instinet.

A third of the world ’ s biggest banks are so weak they could not survive even if the global economy In particular, euro-area banks are earning less than half their 2004-2006 average profits. While many say increases in regulatory capital played a role in weak profitability, the overall return on equity

Indeed, executives around the world are evenly split on the topic. And while the savviest executives Participants in the credit markets tend to pursue the same strategies because it’ s so easy for banks to monitor what other banks are doing. McKinsey uses cookies to improve site functionality, provide

Banks allocate just 35% of their information-technology budgets to innovation, while fintechs spend more than 70%, McKinsey said. Combined with regulatory factors lowering the barrier to entry -- like open banking and looser requirements for startups -- the environment is increasingly conducive for newer firms to take share from banks.

The report points to Amazon.com Inc. in the U.S. and Ping An in China as examples of technology firms that are capturing financial-services customers. To make matters worse for the old guard, the new players tend to go after the business areas that create the highest returns at banks -- credit cards, for example.

Lenders can cut costs and find funds for technology by outsourcing what McKinsey calls “non-differentiating activities,” including some trading and compliance functions. Banks “need to get much more comfortable with external partnerships and being able to leverage talent externally,” Rajgopal said.

The Credit Robot at HSBC Says Odds of a Bear Market Are Now 84%

The Credit Robot at HSBC Says Odds of a Bear Market Are Now 84% From booming bond sales and benign default rates to benevolent central banks, all seems well in the credit market right now. That’s unless you ask the robot prognosticator at HSBC Holdings Plc. require(["medianetNativeAdOnArticle"], function (medianetNativeAdOnArticle) { medianetNativeAdOnArticle.getMedianetNativeAds(true); }); The machine-learning model reckons there’s now an 84% chance of a bear market sweeping U.S. corporate debt within the next year.

The big concern is banks too weak to survive .” If big banks almost capsized the global financial system, are weaker banks actually better for consumers? What’ s the best gamble in the world , right now? Its betting that Deutsche Bank stock is going to go down .

Former Bank of England governor Mervyn King has warned that British banks are too weak to weather another financial crisis, adding that government officials haven't “got However, King also warned that a sudden increase in interest rates could provide too much of a shock to the British economy, which is

Read more: BofA’s cloud expansion could ‘save a ton of money’

Another way to free up money: get bigger. BB&T Corp. and SunTrust Banks Inc. said as much when they announced their decision to combine earlier this year -- the biggest U.S. bank merger since the financial crisis. Rajgopal said he expects M&A to continue in the late cycle.

“Going forward, scale will likely matter even more as banks head into an arms race on technology,” the report says.

To contact the reporter on this story: Hannah Levitt in New York at hlevitt@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Dan Reichl, Steve Dickson

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.

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