A study released on Monday by the Boston Consulting Group suggests that global banks have the potential to increase their combined valuations by $7 trillion over the next five years. Despite obstacles, lenders could double their current valuations if they pursue growth and improved price-to-book ratios. The most significant obstacle is the large gap in profitability, with net interest margins (NIMs) having peaked or even deteriorated in recent years and likely to decline again this year.
While regulatory requirements and the growing challenge of new market entrants like fintech companies remain challenges, a broader shift in how consumers and businesses consume financial services presents an opportunity for banks to expand their revenue streams by offering a fuller range of products and services. They must rethink their customer value propositions and develop strategies for attracting and retaining customers.
At the same time, tectonic shifts in global manufacturing are redrawing the map of where companies manufacture and source goods. This will require banks to rework their supply chain strategies and invest in expanding their presence globally. Banks that embrace these shifts and take aggressive steps to improve operational efficiency, product offerings, and risk management will be well-positioned for future success.
Similarly, climate change is redrawing the boundaries of economic development as nations and businesses seek to build resilience in the face of the growing threats from severe weather, rising sea levels, and more. As a result, demand for adaptation and resilience solutions has spiked, creating opportunities for investors to help finance and promote solutions. Banks with solid capabilities in lending to businesses and governments working to address these challenges will be well-positioned to gain market share and attract investor attention.
Amid these shifts, bank stakeholders need to remember that a return to the profits and valuations enjoyed before the crisis is unlikely. However, they can sustainably earn more than their cost of equity and boost their valuations. In that case, it will be possible for them to fulfill their essential roles as enablers of economic growth and financiers of the global transition to a low-carbon economy.
While a $7 trillion opportunity exists for the sector, it won’t be easy. To seize it, banks must take significant steps to promote growth and boost productivity, restructure their balance sheets, and adopt flexible regulatory frameworks. They will also need to realign their strategies and operations to compete in arenas organized around customer needs that many tech giants, start-ups, and nonbank competitors contest. Ambitious banks willing to embrace the platforms of the future and make informed big bets will have a much better chance of breaking free from stagnant valuations and prospering in the years ahead.
