Global profits of traditional financial institutions rose by about $280 billion due to rising interest rates. The banking industry’s net profit amounted to $1.3 trillion in 2022 and could surpass the $1.4 trillion mark this year.
According to consulting giant McKinsey, the global banking sector has faced many challenges in recent years, but rising interest rates have significantly boosted bank profits. In 2022, the banking sector’s net income grew by $280 billion, hitting $1.3 trillion.
McKinsey analysts also note an increase in return on equity (ROE). Since 2010, this indicator has averaged no more than 9% and may reach 13% in 2023. A rise in interest rates, which has allowed banks to increase earnings on loans and mortgage payments, has also been cited as the main growth driver.
Among other growth drivers of banking sector profitability, analysts named:
- Structural shifts in banking. Balance sheet assets and transactions are being moved from traditional banks to less traditional institutions and markets, reducing capital investment and exposing the sector to a different type of regulation.
- Efficiency gains. Financial institutions continue to reduce costs, which has a major impact on global profit levels. For example, the cost level in 2022 was approximately 52%, though it hasn’t fallen below 59% since 2012.
- Focus on customer needs. 2022 saw a shift in focus to customer service and customer base retention. This approach also had a positive impact on banks’ profits as satisfied customers became a source of additional revenue.
- Adapting to modern technology. Traditional financial institutions have started to actively utilize cutting-edge technologies, including artificial intelligence and blockchain. This has allowed banks to gain greater flexibility in managing funds and scaling ecosystems, as well as reducing operational costs and improving productivity.
McKinsey analysts also highlighted several key trends that will significantly affect not only the profitability of banking institutions but also the global growth of financial institutions in the future:
- Changing macroeconomic environment. Higher interest rates, inflation, and geopolitical risks will continue to have a dramatic impact on the macroeconomic environment, so financial institutions will need to adapt to the new economic reality.
- Technological advances. Banks must integrate innovative technologies to improve performance, manage data, and maintain their position in the global market.
- Regulatory changes. Supervision of financial institutions will expand in the coming years, especially over new and non-traditional market participants, so banks must respond quickly to regulatory changes to meet new requirements.
- Security requirements. Modern technology dictates new rules when it comes to defense against cyberattacks, and ensuring asset security is becoming a critical element of a successful banking business.
European regulators are strengthening oversight of TradFi participants, planning to oblige them to provide information about crypto-assets in their accounts and all aspects of working with digital assets.
