BOSTON—Banks globally should make clear and forceful resolutions for the new year and work with stakeholders to fulfill essential goals: enabling economic growth and financing the climate transition. While banks are unlikely to return to the profitability levels and valuations that existed prior to the global financial crisis, they face a compelling case for change: to earn more than their cost of equity on a sustainable basis, increase valuations, and improve shareholder returns.
These are among the findings of a new report from Boston Consulting Group (BCG), titled To Seize a $7 Trillion Opportunity, Banks Need Bolder Strategies for Serving Customers and Society, being released today. It finds that at least $7 trillion in value can be created over the next five years. This corresponds to roughly doubling current valuations and improving price-to-book ratios to 1.25, on average.
It is critical for banks to set their sights on this target not only to create shareholder value but also to meet their obligations to drive economic growth and finance the climate transition. These aspirations can be reached if banks set a bold agenda that promotes growth, dramatically improves productivity, and makes banks more appealing to investors in order to enable additional capital infusions.
“In more than a decade since the global financial crisis, banks have still not managed to adjust their business models to reflect the new reality they are operating in,” says Axel Weber, a senior advisor to BCG, former chairman of UBS Group AG, and a coauthor of the report. “Urgent actions and a bold vision are needed: banks must redefine where to compete, who to partner with, and how to deliver value amid continued and multifaceted disruption.”
Banks Face a Challenging Operating Environment and a Window of Opportunity
Banks’ share of total financial assets in almost all economies has been steadily declining. The trend is accentuated in markets where many banks have unsustainable financial returns—bank valuations remaining below book value for sustained periods—and in high-growth economies where demand for production credit is rising at a rapid pace.
Yet, the expectations for regulated banks will only increase: higher capital requirements, further consumer-protection rules (especially in a higher-interest-rate environment that poses debt challenges for many households), necessary investments into shared financial infrastructure, and further fee compression owing to increased competition.
As governments and regulators increase their designs on the future of financial markets and innovation, there is a window of opportunity to address information gaps between financial actors and government decision makers. By creating full transparency on long-term regulatory objectives, implementing new technologies (such as real-time payments networks) to realize lower-cost infrastructure outcomes, and enabling economic options for banks to earn returns above the cost of equity, banks and regulators can create win-win solutions for many economies.
“Governments will place a heavy burden on banks to serve as catalysts for change, especially in the area of climate transition, while regulators will continue to request additional capital requirements,” says Saurabh Tripathi, the global leader of BCG’s Financial Institutions practice and a coauthor of the report. “This creates an important opportunity for collaboration. Regulators can take complementary steps, without compromising on systemic stability and risks, that reinforce banks’ business models. These could be in the form of new approaches to regulation, consolidation where appropriate, the creation of industry utilities, or frameworks for easier outsourcing to enable more scale benefits, for example.”
A Set of Bold Actions Will Unlock Enormous Value
If banks want to win competitively, they must drive toward far-higher productivity and radically reduce the cost of complexity. Starting with a digital-first delivery concept and a detailed cost-driver understanding, it is possible to design a zero-based business model that will allow a step change in productivity that is 40% higher than what is considered normal today.
Banks will also need to make portfolio decisions that enhance value. They should exit business lines or, at a minimum, reduce capital exposure to low-return asset classes and invest in new areas of strategic growth that possess more favorable levels of return on equity.
Banks’ dramatically simplified business models must be supported by an actively managed balance sheet, a modern platform operating model, a bold deployment of front-to-back digitization, and a comprehensive reimagination of functions that leverage AI and generative AI. The new operating model should help deliver vastly more impact from data and technology as well as help build strategic partnerships and capabilities for competitive advantage.
“Banks cannot just aspire to be technology companies,” said Kilian Berz, vice chair of BCG’s Financial Institutions practice and a coauthor of the report. “They have to be tech product companies that encapsulate the ideas of customer obsession, test and learn, and radical simplicity, along with embracing risk management and compliance as a strength.”
Download the publication here.
Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we work closely with clients to embrace a transformational approach aimed at benefiting all stakeholders—empowering organizations to grow, build sustainable competitive advantage, and drive positive societal impact.
Our diverse, global teams bring deep industry and functional expertise and a range of perspectives that question the status quo and spark change. BCG delivers solutions through leading-edge management consulting, technology and design, and corporate and digital ventures. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, fueled by the goal of helping our clients thrive and enabling them to make the world a better place.