Transforming a global industry and securing tomorrow’s growth · on balance sheet Other assets 262 Sources of funds: USD trillion Sales & Trading (including Prime Services) M&A

Transforming a global industry and securing tomorrow’s growth

FINANCIAL TIMES BANKING SUMMIT 2018

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

December 2018 @McKBanking

McKinsey Financial Services

2McKinsey & Company

Global, 2006-17

13

14

12

0

10

11

20162010 2014

10.8

11.1

2012 2017

12.212.1

2008

12.6

13.2

2006

9.8

9.5

13.0

12.1

11.411.3

A decade after the crisis, a safer banking system…

Emerging markets

Developed world

2012 2017

Western Europe 13.0 15.9

Emerging Asia 11.6 13.2

EEMEA 14.4 14.2

China 10.2 10.8

Other Developed 11.0 12.4

North America 12.6 13.1

Japan 11.9 13.2

Latin America 10.5 12.9

Tier-1 capital ratios, %

3McKinsey & Company

Global ROE & Tier 1 Ratio

Percent

… safer, but stuck in neutral

11 12 20171307 142006 15

5

10

160

15

08 09

20

10

Tier 1 ratio

ROE

4McKinsey & Company

Cost and risk discipline making up for capital and margin pressure Change in lever increases ROE

Change in lever decreases ROE

2012

Percent Margin Risk cost

Cost

efficiency Taxes

Fines and

other Capital

2017

Percent

Global return on equity levers from 2012 to 2017,%

8.4Global -3.3 1.1 4.7 -0.8 0.9 -2.0 9.0

Emerging

17.4EEMEA -10.2 -2.3 7.2 1.5 -0.2 -0.8 12.6

20.5China -10.3 -4.6 7.4 2.6 -0.2 -2.2 13.1

15.9Emerging Asia -1.8 -6.4 0.4 1.9 -0.1 -0.8 9.1

14.0Latin America 2.5 0.1 0.6 -1.5 0.0 -0.4 15.3

-0.7Western Europe -6.5 7.9 4.6 -1.5 4.5 -2.1 6.1

1.3United Kingdom 4.1 4.6 0.5 -2.0 -3.2 -1.3 4.0

8.7North America -3.5 1.1 5.0 -2.7 0.2 -0.6 8.4

6.6Japan -4.3 0.5 2.1 1.4 0.6 -1.0 5.8

Developed

11.1Other developed -6.9 1.4 3.7 0.3 0.3 -0.6 9.3

5McKinsey & Company

0

40

10

20

30

1208032002 04 05 06 07 09 10 1511 13 14 16 20170

1

3

2

4

1003 04 09 20172002 05 06 07 08 11 12 13 14 15 16

The great convergence

Banks price to book value (P/B) ratios, 2002-17 Banks return on equity (ROE), 2002-17,%

Total developed

Total emerging

Total developed

Total emerging

6McKinsey & Company

Investment Banking

12

29

9

11

2

35

12

2007

36

6

13

31

36

3

13

5

14

3

2017

Wealth & Asset Management

Payments

Corporate & Commercial Banking

Market Infrastructure

Retail Banking

~ 3.9

~ 4.5

~ 5.0

2012

30

3% p.a.

2% p.a.

Growth remains muted…

53

0.4-5

45

31

14

25

100% =

Global Industry Revenues,

USD trillion

CAGR 2007-12

(%)CAGR 2012-17

(%)

7McKinsey & Company

Global P/B ratios

…and banking valuations remain structurally low…

0

2.5

1.5

3.0

1.0

0.5

2.0

2002 1303 04 05 1006 1108 09 12 14 15 16 201707

+18%

-13% -53% -45%

Banks2 Non-Banks

8McKinsey & Company

Global return on equity (ROE) vs price to book value (P/B) by industry, 2012-17

… in fact, banking valuations have lagged those of all other industries

10.05.0

1.5

1.0

15.00

0.5

2.0

2.5

3.0

3.5

IT

Banks

Energy

ROE, %

P/B

ConsumerDiscretionary

ConsumerStaples

Materials

Healthcare

IndustrialsTelecom

Utilities

9McKinsey & Company

A complex financial intermediation system… Share of total revenue in 2017, % XX%Annual revenue in 2017, USD billion

Uses of funds: USD trillion

Total annual revenue of financial intermediation is ~$5tn 36

47

44

22

54

46

13SWFs & PPFs

Retail assetsundermanagement(AuM)

Banks’ bonds, other liabilities &equity

Personal deposits

Insurance & pension funds AuM

Other AuM

Corporate &public deposits

262

9

42

31

46

11

11

41

46

25

Corporate bonds

Retail loans

Equity securities

Otherinvestments

Governmentbonds

Securitized loans

Corporate & public loans

Securities held on balance sheet

Other assets

262

Sources of funds: USD trillion

Sales & Trading (including Prime Services)

M&A advisory

Origination (ECM, DCM)

Retail asset management

Private Capital (PE, PD)

Institutional asset management

Retail brokerage

Wealth mgmt

Bancassurance

Investment banking

40

25

150

Wealth and asset management

175

45

150

150

100

40

13

%

Listing & trade execution venues

Clearing & settlement

Securities services

Market infrastructure

45

15

80

3%

5%

Payments

Business-to-businessBusiness-to-consumer270 445 1

4%

Corporate and commercial banking Corporate & public lending

965Corporate & public deposits560

Mortgage

Consumer finance

470

730Retail deposits 545

Retail banking Tre

asu

ry 30

%3

5%

10McKinsey & Company

…where banks still dominate today Share of total revenue in 2017, % XX%Annual revenue in 2017, USD billionCore activity for banks



47

44

22

54

46

13SWFs & PPFs




Other AuM

Personal deposits

262


9

42

31

46

11

11

41

46

25Otherinvestments


Corporate bonds

Equity securities

Governmentbonds

Retail loans

Securitized loans


Other assets

262



M&A advisory





Retail brokerage

Wealth mgmt

Bancassurance

Investment banking

40

25

210


175

45

150

150

100

40

13

%

Listing & trade execution venues


Securities services5


30

15

80

3%

5%

Payments

Business-to-businessBusiness-to-consumer270 445 1

4%


965Corporate & public deposits560

Mortgage

Consumer finance

470


Retail banking Tre

asu

ry 30

%3

5%


But powerful forces are driving change

1 Breakthroughs in

data and

technology

innovation

2 Regulatory

catalysts

Scale increasingly

important for

incumbents

Pathways for new

entrants


A simpler set of layers as a conduit for global funds?

So

urc

es

of

fun

ds



47

44

22

54

46

13

262




SWFs & PPFs1


Personal deposits

Other AuM2

9

42

31

46

11

11

41

46

25

Equity securities

Otherinvestments5


Corporate bonds

Governmentbonds

Securitized loans

Retail loans

Other assets


262



M&A advisory





Retail brokerage

Wealth mgmt

Bancassurance

Investment banking

40

25

150


175

45

150

150

100

40

13

%

Listing & trade execution venues3


Securities services5


45

15

80

3%

5%

Payments

Business-to-businessBusiness-to-consumer 270 445 14

%


965Corporate & public deposits 560

Mortgage

Consumer finance

470


Retail banking Tre

asu

ry 30

%3

5%

Low-touch B2B

Relationships and insights

Everyday commerce and transactions


A simpler set of layers as a conduit for global funds?

So

urc

es

of

fun

ds

Us

es

of

fun

ds

Low-touch B2B

Key KPIs

▪ 100% STP▪ Bid ask margin compression▪ Surveillance▪ Price transparency

Goal

Heavily automated and efficient technology infrastructure, with low costs and tight spreads

Key Tech

▪ Distributed ledger technology (DLT)

▪ AI/Machine Learning

Relationships and insights

Key KPIs

▪ Privacy▪ Experience

Goal

Perfectly personalized digital advice (Al and human, seamlessly integrated) leveraging all digital footprint

Key Tech

▪ Al▪ Voice/AR/VR

Everyday commerce and transactions

Key KPIsGoal

Seamless, invisible, transactions embedded into everyday digital life E2E ecosystem journeys

Key Tech

▪ BOTS▪ Face recognition▪ Zero track payments

▪ Invisibility▪ 100% op efficiency▪ Integration

So

urc

es

of

fun

ds

So

urc

es o

f fu

nd

sU

se

s o

f fu

nd

s


Become an end-to-end ecosystem orchestrator

Focus more narrowly on

specific business

segments

Fully optimize & digitize as a

traditional player

Become a low-cost

“manufacturer”

How should banks respond to this disruption?

WORKING DRAFT

Last Modified 03-Dec-18 23:27 GMT Standard TimePrinted 03-Dec-18 23:27 GMT Standard Time

Pick up a copy of McKinsey’s global banking annual review at today’s conference, or download a summary and request a full electronic copy of the report today at: https://mck.co/BanksChangingWorld

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McKinsey Financial Services

Documents

Transforming a global industry and securing tomorrow’s growth · on balance sheet Other assets 262 Sources of funds: USD trillion Sales & Trading (including Prime Services) M&A