A newly released study from Boston Consulting Group (BCG) has found global banks could increase their combined value by US$7tn in the next five years, should adequate plans be implemented to boost productivity and promote growth.
The study comes at a time when bank valuations are of serious concern, with 75% of bank equity traded below a price-to-book ratio of 1.00 in 2022.
The share of total financial assets banks have has been steadily declining too, in almost all economies. Surging neobanks have taken significant shares, particularly in markets where incumbent banks report unsustainable financial returns.
BCG: How banks can adopt a new approach to achieve growth
However, BCG says banks hold the power to change this narrative, increasing their valuation by up to US$7tn in the next five years by creating worth through strategic changes, new partnerships, consolidation, simplified operations and embracing platform-based organisation.
This change can only be achieved by setting a bold new agenda to one that improves productivity, attracts capital and ultimately promotes growth, adds BCG.
Indeed, global banks are not merely obliged to create shareholder value, they are also the gatekeepers to driving economic growth, particularly in a challenging environment, and are the financiers of the climate transition.
To meet these global needs, executive teams need to “step up and embrace the challenge” of radical change.
Axel Weber, senior advisor to BCG, former Chairman of UBS Group AG, and a co-author of the report says: “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.
“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.”
Banking transformation: The role of governments and regulators
Indeed, governments and regulators will have a role to play in establishing a vibrant future banking industry tailored to maximum growth potential.
For BCG, it’s crucial that state-run bodies support banks without compromising their systemic stability, and should introduce a range of complementary measures aimed at enhancing the value of banks in the jurisdictions they reside.
While global capital requirements, consumer-protection rules and investments into shared financial infrastructure look set to ramp up the requirements on banks, and increase competition, BCG points to “a window of opportunity” to address information gaps between financial actors and government decision-makers.
As governments and regulators increase their designs on financial markets, now is the time when dialogue can be had to ensure regulations support the growth.
BCG’s report reveals that by creating full transparency on long-term regulatory objectives, implementing new technologies like real-time payments (RTP) networks to realise lower-cost infrastructure and enabling economic options for banks to earn returns above the cost of equity, regulators and banks can develop “win-win” situations in the economies they serve.
Saurabh Tripathi, Global Leader of BCG’s Financial Institutions practice and report co-author, adds: “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.
“This creates an important opportunity for collaboration. Regulators can take complementary steps, without compromising on systemic stability and risks, that reinforce banks’ business models.”
How banks can unlock significant value
Of course, to see the value of increased productivity and cost reductions, banks must first onboard the fintech capabilities to effectively streamline their operations.
BCG believes that if banks adopt a digital-first delivery concept and ramp up cost-driver understanding, it can lead to the establishment of zero-based business models, increasing productivity to 40% higher than what it is today.
Leveraging AI and Gen AI will be key if banks are to deploy bold back-to-front digitisation, develop a modern platform operating model and create an actively managed balance sheet.
Banks will need to make difficult portfolio decisions too, noted BGC, exiting business lines if possible, and – at the very minimum – reduce capital exposure to low-return asset classes and invest in new areas of strategic growth with greater returns on equity.
Kilian Berz, Vice Chair of BCG’s Financial Institutions practice and report co-author concludes: “Banks cannot just aspire to be technology companies. 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.”