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It's been five years since the financial crisis began, and banking still has a weaker reputation than the airline industry, big pharma and the energy sector. At least there's someone out there who more likely than not has a decent impression of you: your customer.
June 25 -
Using return on equity as a performance measure without a risk adjustment is like trying to fly a plane without an altimeter. Sooner or later you will hit something.
October 23
The best-performing banks in the world share one common trait: they don't try to be all things to all people.
While some banks have certainly been successful in serving a client base that ranges from mom-and-pop operations to multinational conglomerates, the most profitable and efficient banks tend to have more targeted strategies, according to a new report from McKinsey & Co.
Some, like Wells Fargo (WFC), have prospered by excelling at retail banking Wells' cross-sell ratios are the envy of the industry while others have thrived by targeting niche markets or just by remaining exceptionally disciplined in their underwriting.
The key, McKinsey concludes, is to find a strategy that works best and stick with it.
Nearly half of the world's 500 largest banks are considered underperforming, and many are in need of a "strategic reset," McKinsey said in its annual report on global banking released late Wednesday. Some will inevitably be acquired, but others that wish to remain independent need to stop "pulling at all available levers" and figure out what they want to be.
Too many banks "are trying to do too many things, [and] their strategies have converged on a muddy middle that is difficult to execute and unlikely to create value," said the report authored by a team of consultants in McKinsey's global financial institutions group.
Of the 500 largest global banks, only 90 are considered to be "outperformers," with returns on equity of 15% or above and price-to-book ratios that exceed 1%. They come from all over world, but most hail from developed markets, including nearly 25 that are based in the United States.
Of the rest, 180 are viewed as satisfactory performers and the rest are seen as underperformers.
The report acknowledges that some of these banks have sound business models that, for whatever reason, are not fully appreciated by investors. However, the majority are at a point where they need to mimic the approaches of the outperforming banks if they hope to remain independent, McKinsey said.
According to McKinsey, the most successful banks follow one of five strategies. The first is providing "distinctive" customer service for which customers will pay a premium. Wells gets high marks in this area, largely for its success in cross-selling. Its customers have an average of more than six products with the bank, compared with an industry average of roughly two products per customer.
The second is a back-to-basics approach in which banks offer straightforward products and services at a reasonable cost, while strategically pursuing acquisitions to gain scale. Among U.S. banks, Comerica (CMA) and M&T Bank (MTB) have had the most success with this approach, McKinsey said.
The third is what McKinsey calls "balance-sheet-light investment specialists." Banks in this group focus less on retail banking and more on providing cash management and other high-touch services to corporate and institutional clients. Successful banks in this group include State Street (STT) and Bank of New York Mellon (BK).
The fourth strategy is focusing on growth markets before others get there. For example, Standard Chartered Bank, based in London, was among the first banks to recognize growth opportunities in Asia and Africa and, as a result, has become a prominent middle-market lender in those regions.
The fifth strategy is a global one that a number of banks have pursued but, according to McKinsey, few have had success with. These banks tend to have large retail operations at home while focusing largely on capital markets and investment banking business abroad. Only seven of the 90 outperformers are what McKinsey refers to as "global-at-scale" banks.
For many banks especially smaller ones looking to adopt one of these strategies, the choice will likely come down to the distinctive service or back-to-basics models, says Fritz Nauck, a senior partner at McKinsey. Only banks that already have a strong wealth management arm can succeed with the "balance-sheet-light" approach, and the others are simply too out of reach for most banks, he says.
To achieve Wells-like cross-sell ratios, banks better be prepared to invest in technology.
"The banks that have done well do a lot more rigorous analytics around the data to drive the cross-sell," Nauck says. "There's a real separation between the banks that are investing in a meaningful way and getting it right and banks that might be talking about it but aren't really investing."
Back-to-basics is a more realistic option for many banks because it requires less investment and is relatively easy to implement. The challenge is resisting the temptation to invest in new business lines that could potentially improve returns but also increase the bank's risk.
"It requires a lot of discipline," Nauck says. "The challenge on this one is not getting enamored with a different strategy and changing course."
Still, for some banks, the best course of action might be finding a merger partner. McKinsey estimates that 20% of the world's banks will become acquisition targets within the next several years.
