Global Banking Annual Review 2022 Banking On A Sustainable Path

Banking on a
sustainable path
Global Banking Annual Review 2022
December 2022
Contents
3
Executive summary
6
The year everything changed—except banking valuations
26
The next era for sustainable finance
Global Banking Annual Review 2022 2

Executive summary
The much-quoted line about how “there are decades suggesting that sustainable finance is entering a
when nothing happens, and weeks when decades “next era,” as the initial surge of funding for renewable
happen” has been attributed to a number of sources, energies gives way to a deeper engagement with
none of whom are known for their banking prowess. banking clients across all sectors.
But for the global banking industry, that remark
Key findings from our global banking review for 2022:
certainly seems an apt summary of events in 2022.
A decade of rather dull predictability was suddenly Banks rebounded from the pandemic with strong
overturned, as inflation made a galloping return, revenue growth from higher margins and capital
interest rates soared, and volatility became the ratios. Bank profitability reached a 14-year high in
watchword on markets ranging from stocks and bonds 2022, with expected return on equity of between
to cryptocurrencies and Chinese real estate. 11.5 percent and 12.5 percent. Revenue globally grew
by $345 billion, propelled by a sharp increase in net
In this year’s Global Banking Annual Review, we
margins, as interest rates rose after languishing
examine what has changed in banking as a result
for years on their cyclical floors. For now, banking
of the shocks to the system wrought by the return
globally is sitting comfortably on Tier 1 capital ratios
of geopolitical instability coupled with lingering
of between 14 percent and 15 percent, and many
long-term disruptive effects from the COVID-19
segments of banking—including retail, wholesale,
pandemic. The picture is far from pretty: while revenue
and wealth—have benefited.
and margins rose on the back of higher interest rates,
more than half of the world’s banks trade below book Despite these short-term improvements, return on
value. Indeed, banking ranks dead last in a comparison equity remains weak, far below where it was before
of the market valuations of different industry sectors, the 2008 financial crisis. While half the world’s banks
driven by its weak profit margins and low growth in 2022 continue to have a return on equity that is
expectations. above the cost of equity, our analysis suggests that the
recent margin increases delivered returns above the
The annual review is not just a tale of woe, however.
cost of equity for just 35 percent of banks globally.
Even amid the poor outlook for global banking as
a whole, there are some very bright spots, with Strong regional variations in bank performance
outperformers to be found in India and other fast- underlie this global picture. Banks in some countries,
growing markets, as well as in certain groups of banks including many regional banks in the US, the largest
in advanced economies including the United States banks in Canada, and banks in Indonesia, Mexico,
and Canada. The main message that comes through and India, are experiencing rapid growth and rising
is that, at a time of growing divergence, and relatively profitability, while others, including in Europe and
better returns in 2022, banks everywhere need to China are seeing marked downturns. One notable
work harder to “future-proof” themselves, improving effect of this divergence is that the whole notion of
their short-term resilience and embracing longer-term “emerging markets” (in banking) is dead, because
opportunities to grow and become more profitable. the group of countries to which this term refers is no
longer monolithic: some of the best-performing
One of those opportunities is sustainable finance,
and high-growth banks are to be found in Asia—as
a burgeoning new theme for banking. We look at the
are some of the worst-performing and lowest-growth
topic in depth, and attempt to disentangle the real
ones.
business case from the hype and greenwashing. In the
second chapter of this report, we examine evidence

As the economy slows, the divergence between (ESG) investing, beyond-banking offerings,
banks will widen further. The boost to profitability and advanced analytics.
from higher margins may prove transitory, and
Sustainable finance has grown fast from almost
all banks face a long-term growth slowdown.
nothing five years ago to become a major theme for
Banks in Asia–Pacific may gain from a stronger
banks. Issuance of sustainable bonds now accounts
macroeconomic outlook, whereas European banks
for about 11 percent of the total bond market volume,
face a bleaker outlook: in the event of a long recession,
while sustainability-related syndicated loans are about
we estimate that banks’ return on equity globally could
13 percent of the global syndicated loans market
fall to 7 percent by 2026—and below 6 percent for
volume. While Europe historically led issuance of
European banks. The net impact will likely be a further
sustainable debt instruments—issuing more than 80
concentration of growth in Emerging Asia, China,
percent of sustainable syndicated loans, including
Latin America, and the United States. We expect that
sustainability-linked loans, in 2018—it has since been
these regions will account for about 80 percent of
overtaken by North American issuers.
the estimated $1.3 trillion in global banking revenue
growth between 2021 and 2025. Financing clean energy marked the first phase of
growth, but sustainable finance is now broadening
Banking as a sector is valued substantially below
and deepening. There will still be a focus on capital
other industries. Total global market capitalization
deployment for low-emissions power generation in
peaked in 2021 at $16 trillion and dropped back
the next phase, but many new aspects of the global
to $14.5 trillion by May 2022. Traditional banking
energy transition will also become priorities, including
institutions account for half of this valuation, while
growth in electrification, the build-out of energy
specialists and fintechs represent the other half—up
transmission and distribution infrastructure, and
from a 30 percent share five years ago. About one-half
emissions reductions across sectors. Expected heavy
of the valuation gap with other sectors is driven by the
spending on physical assets required to meet net-
low profitability of the banking industry. The other half
zero emissions goals alone could provide commercial
comes from the lack of future growth, demonstrated
financial institutions with an annual direct financing
by the low price-to-earnings of about 13, compared
opportunity of about $820 billion. We estimate that
with an average in other sectors of 20. Today, only
banks could also facilitate an additional $1.5 trillion of
one out of six banks qualify as what we call “North
investments for corporates between 2021 and 2030.
Stars”—institutions with both high profitability and
high growth. To capture the sustainable finance opportunities
and scale the business, banks will need to address
Banks now have an opportunity to take bold
critical issues. Only a small percentage of banks
steps to build short-term resilience and lay the
have near-term capabilities to finance some of the
groundwork for long-term growth. Optimizing
most dynamic burgeoning areas, including grid-scale
balance sheets and cost and capital positions will
infrastructure, green hydrogen, green fuels, biomass,
help banks through these volatile times, and it will
and carbon capture and storage. Challenges include
be more important than ever to build exceptional
credit risk, complex project economics, and lack
risk management practices and technological
of established standards for sustainability-related
infrastructure that can resist cyberattacks. In the
financial products. But new instruments, new markets,
longer term, banks from traditional business models in
and new revenue pools beckon for those corporate
particular will need to transition to more future-proof
and investment banks, lenders to small business
platforms, in which different business units such as
and retail customers, and wealth managers, among
everyday banking and complex financing or advisory
others, who step willingly into the next era
services will be decoupled, so that banks can foster
for sustainable finance.
highly differentiated customer relationships. They will
also need to embrace new industry-shaping growth
trends, such as environmental, social, and governance

The year everything
changed—except
banking valuations
Over the past 12 years, the global banking sector financial institutions in developing countries,
has experienced a remarkably flat period. Return which had previously moved largely in lockstep,
on equity hovered at or below the cost of equity. and undermined the very notion of an “emerging
Revenue growth remained below GDP growth, and market” bank.
margins were slowly eroded by low interest rates
Even fintechs, rising stars for much of the past few
and rising competition, including from well-funded
years, took a beating as several segments, including
fintechs and bigtechs. Emerging markets, thanks
buy now, pay later (BNPL) and crypto markets,
to their strong performance, closed the gap with
ran into trouble.
advanced economies; China featured as a consistent
outperformer. Asset values rose seemingly inexorably, In fact, only one aspect of banking remained
fueled by low interest rates, and some high-risk asset stubbornly, resolutely immutable: banks’ ultralow
classes, including cryptocurrencies, soared to new valuations, which make the sector the least valued of
heights. Even a once-in-a-century pandemic made any industry. While almost half of banks create positive
barely a ripple in these predictable trends. economic profit, only about 15 percent of financial
institutions are both profitable and growing rapidly.
Then came 2022, and suddenly almost everything
Despite an expected uptick of two to three percentage
changed (Exhibit 1).
points in global banking ROE for 2022, investors
Interest rates leaped from their historic lows, and appear to be emphasizing future growth and remain
with them, bank margins increased after a decade or reluctant to trade at higher price-to-book ratios.
more of contraction. At a global level, banks’ return on
What brought about all these reversals? In this
equity edged above the cost of capital after years of
chapter, we examine the key causes and the broader
languishing below it.
lessons as the global banking industry goes through
The context in which banks operate also changed. The an extraordinary period of volatility. Among the
Russian invasion of Ukraine and renewed tensions main learnings, even as they try to remain resilient
over Taiwan pushed geopolitics onto business during the current tumult, banks everywhere have an
agendas globally, even as the COVID-19 pandemic’s opportunity to make use of higher margins to invest
longer-term impacts continued to reverberate through and reinvent as they lay the groundwork for long-term
the global economy. Sustainable finance moved growth and profitability. That so many banks have such
from being an emerging and imprecise theme low valuations is a clear sign that the banking industry
to a better-defined source of growth (as we outline lacks a future-proof business model and the growth
in the next chapter). premium seen in other industries. This is the time
to change the existing model.
Inflation, long relegated to hazy memories of a distant
past, made a rude return.
On a country-by-country level, the worst banking

performance occurred in China, long the engine of
global growth in banking and other sectors, as the
country stayed in pandemic lockdown mode and its
overleveraged property market ran into trouble. That
contributed to a divergence in the performance of

Web <year>
Exhibit
<Title> 1
Exhibit 1 of <x>
The yeareverything
The year everythingchanged—except
changed— except banking
banking valuations.
valuations.
The Flat Decade (2012–21) The New Era (2022)
Profitability Return on equity at or below cost of equity Return on equity 2–3% above cost
of equity
Revenue growth Slightly below GDP growth, with volume Slightly above GDP growth, as margins expand
growth offset by slowly eroding margins due with higher base rates, offset
to competition and low interest rates by limited volume growth
Risk and capital Converging and low-risk cycle with capital Period of higher risk cost with divergence
buffer reaching historical highs (by segment, geography) and further uptick in
capital ratios driven by the higher profitability
Geographic spread Slow convergence between emerging and The concepts of emerging and developed
developed markets (with emerging markets blur, with huge market-level
consistently outperforming) divergences (eg, China vs India)
Competition Well-funded, frequently loss-making fintechs Fintech and bigtech valuation corrections lead
and ever-expanding bigtechs cherry-picked to retrenchment to focus on profitability vs
lucrative segments with limited market share growth; many at-scale success stories emerge
gain and sustained disruption
Global environment Stagnation of globalization, general stability, Reemergence of geopolitics as a disruptive

strong international rules of law ensuring force (most notably driven by the invasion of
stable global flows Ukraine); potential regionalization of banking
Asset valuations Continuous growth fueled by low interest Major valuation correction, retrenchment
rates, high-risk asset classes (eg, crypto) to value investing, huge market volatility,
leading to overvaluation (eg, in Chinese and uncertainty
real estate)
New social contract ESG accreditation is universally Substantial rethinking of the measures and
accepted measure and driver of banker impact of sustainability, with wide regional
and investor behavior divergence in maturity
What did not change: Banks continue to be valued at a historically high discount compared
with the broader economy, and the gap is widening, with 50% of banks destroying value
McKinsey & Company
For banks, 2022 has been Revenue grew by $345 billion as growth
a tumultuous year of multiple shocks rebounded, but profitability still lags
and growing uncertainty Bank profitability reached a 14-year high in 2022,
with expected return on equity between 11.5 and
Banks rebounded from the pandemic with strong
12.5 percent (Exhibit 2). Revenue globally grew by
revenue growth from higher margins and Tier 1 capital
$345 billion. This growth was propelled by a sharp
ratios at their highest level in 20 years. But the context
increase in net margins, as interest rates rose after
has changed dramatically, with a series of interrelated
languishing for years on their cyclical floors. Ample
shocks—some geopolitical and others lingering
liquidity and relatively low risk contributed to the rise.
economic and social effects of the pandemic—
In 2022, banking liquidity, measured as the ratio of
exacerbating fragilities. While some banks in some
loans to deposits, is about 90 percent, while COVID-19
geographies are doing very well, more than half of
provisions are still being written back. For now,
banks globally are earning less than the cost of equity.
the banking system globally is sitting comfortably
on Tier 1 capital ratios between 14 and 15 percent—the
highest ever.

Web <2022>
Exhibit 2
<GBAR2022>
Exhibit <1> of <7>
After aadecade
decadeofofflat
flatreturns,
returns, 2022
2022 represented
represents a era
a new newinera in banking.
banking.
Banking profitability through the eras
Return on equity,1 % Not adjusted¹ Adjusted² Forecast range Cost-of-equity band

18 18
16 16
14 14
12 12
10 10
8 8
6 6
4 4
2 2
Golden Global Flat New
age financial crisis decade era
0 0
2000 2005 2010 2015 2020
1
Accounting ROE, including the full impact of provisions.
²For 2020 and 2021, ROE has been adjusted for cyclicity for provisions during the COVID-19 pandemic.
Source: S&P Global; McKinsey Panorama
McKinsey & Company
The improvement in margins, which rose from 252 Behind this global picture are some important regional
basis points in 2021 to 262 basis points in 2022, variations in bank performance, which we analyze in
accounted for 60 percent of the revenue gains. Almost more depth later in this chapter—in particular, strong
all segments of banking have seen improvements— divergences within and among emerging markets,
capital markets and investment banking was the with individual banks and banking sectors in some
exception (Exhibit 3). The strongest growth has been countries experiencing rapid growth and rising
in wealth management, which recorded 8 percent profitability as others are seeing marked downturns.1
growth in 2021–22, far higher than the 4 percent The impact of inflation and interest rates is likely to
in 2019–21. The biggest turnaround has been in accentuate this regional divergence, including that
everyday banking—current accounts, deposits, and of advanced economies. The European economy
payment transactions—which posted growth of 7 is particularly exposed to rising energy prices and
percent in 2021–22 due to high money market rates, a possible GDP contraction that could heighten
compared with a yearly 4 percent average decline systemic risk and flatten demand for fresh credit.
in 2019–21.
1 We capture an extended banking landscape that includes activities of traditional banks and of specialist finance players (for example, consumer
finance and payments specialists, fintech companies, brokers/dealers, leasing companies, investment banks, financial exchanges, and asset
managers). Insurance companies, hedge funds, and private-equity firms are excluded.

Web <2022>
Exhibit 3
<GBAR2022>
Exhibit <2> of <7>
Margins arebecoming
Margins are becominga amore
more important
important driver
driver of growth
of growth in banking, compared
in banking,
with volume.
compared to volume.
Revenue per segment, 2019–22, $ billion
6,507 Capital markets and Composition of the growth

CAGR, % 6,163 investment banking
327 between 2021–22, $ billion
5,870 352 –7
16 503 Asset management
263 5
5 478
434 Small and medium-
1,232 size enterprises
2 1,158 6
1,110
Growth of
1,470 Large corporations revenue pool
1,387 6
1,363 1 345
8 398 Wealth management

342 4 370
905 7 966 Everyday banking

990 –4
635 6 673 Mortgages

559 7 Volume Margin
7 impact impact
809 4 878 938 Consumer finance¹ 138 (40%) 207 (60%)
2019 2021 2022²
1
Includes microloans and professional loans.
²Estimated.
Source: Global Banking Pools, McKinsey Panorama
McKinsey & Company
Banking’s strongly positive revenue and profit growth Lingering effects of COVID-19 and geopolitical
also needs to be put into context. Profitability as tensions shook the global economy and are roiling
measured by return on equity remains relatively weak the financial sector
when viewed over the longer term. Despite the post- The long-tail effects of the COVID-19 pandemic
COVID-19 bounce, return on equity remains far below are still being felt, from supply chain disruptions to
where it was before the 2008 financial crisis, and people’s changing attitudes to employment. The
on a global basis, it is only slightly above the cost of Russian invasion of Ukraine in February 2022 and
equity, as Exhibit 2 showed. Indeed, more than half heightened tensions over Taiwan marked the rude
the world’s banks in 2022 continue to have a return return of geopolitics as a disruptive force after
on equity that is below the cost of equity. For the decades of relative stability—exacerbating pandemic-
second half of 2022, our analysis suggests that margin related effects and creating new shocks, notably
increases delivered returns above the cost of equity including an energy supply crisis in Europe. This
for just 35 percent of banks globally. And less than 15 combination of disease and armed conflict proved
percent of banks are earning more than 4 percent of toxic for the global economy. Together, they create
their respective cost of equity. a highly uncertain environment.

Five resulting shocks are affecting banks globally: began as a global resource crisis as a result of the
pandemic’s impact on global supply systems and has
1. Macroeconomic shock. Soaring inflation and
now spread because of ripple effects of Russia’s war
the likelihood of recession are sorely testing
on Ukraine. At the same time, they are playing out
central banks, even as they seek to rein in their
differently around the world. While Europe, China,
quantitative-easing policies started during the
and Developed Asia struggle the most, other regions,
global financial crisis in 2008 and accelerated via
including in the Middle East, are benefiting from rising
unprecedented simultaneous stimulus programs
energy prices. The overall impact in North America is
during the COVID-19 pandemic.
also more nuanced (Exhibit 4).
2. Asset value shock. The shocks to asset values
The reactions are accordingly different. For example,
include steep declines in the Chinese property
central banks in the United States and Europe have
market and the sharp devaluation of fintechs and
hiked rates assertively to choke off the inflation that
cryptocurrencies, including the bankruptcy of
partially resulted from the resources crisis—mitigating
some high-profile crypto organizations. In addition,
the spread between rates and inflation that reached
sanctions against Russia for the first time cut off
its highest level in four decades (Exhibit 5). Meanwhile,
a major economy from much of the global
in China, continuing COVID-19 lockdowns have slowed
financial system.
the economy and taken a toll on domestic
3. Energy and food supply shock. Disruptions consumer sentiment.
to the energy and food supply, related to the war
It is beyond the scope of this annual banking review
in Ukraine, are contributing to inflation and putting
to analyze these five shocks and their consequences
millions of livelihoods at risk, especially but not only
in detail. That has been done and continues to be done
in Europe.
by many others, including at McKinsey.3 However, as
4. Supply chain shock. The disruption of supply one illuminating symptom of the volatile landscape,
chains that began during the first pandemic we focus on the Chinese real estate crisis and its
lockdowns continues to roil global markets. effects on Chinese banking and on the global banking
industry, not least given the size of the challenges
5. Talent shock. Employment underwent major shifts
that this crisis poses (see sidebar “China’s property
during COVID-19, as people changed jobs, began
crisis and its implications for banking”).
working remotely, or left the workforce altogether
to join the “great attrition.”2 These shifts show
no sign of easing although the pandemic wanes
in many places.
These shocks are not necessarily good or bad for

banks, but they created a rise in volatility and big
changes compared with the relative stability of
the past 12 years. The shocks are interrelated. For
example, rising prices for food, fuel, and commodities
2 Aaron De Smet, Bonnie Dowling, Marino Mugayar-Baldocchi, and Bill Schaninger, “‘Great attrition’ or ‘great attraction’? The choice is yours,”
McKinsey Quarterly, September 8, 2021.
3 See, for example, Chris Bradley, Jeongmin Seong, Sven Smit, and Jonathan Woetzel, “On the cusp of a new era?” McKinsey Global Institute, October
20, 2022.

Web <year>
<Title>
Exhibit 4 <x>
Exhibit 4 of
The impact of shocks in 2022 varies across regions, with Europe likely
The impact of shocks in 2022 varies across regions, with Europe likely
to suffer most.
to suffer most.
Impact of global shocks by region
Positive Mixed Negative
Country/region Share of Overal Energy and Asset and Supply Monetary Labor
global impact commodity valuation chain and fiscal costs and
GDP, 1 % prices correction disruption policies availability
North America 27
Europe 25
China 15
Developed Asia 11
Emerging Asia
8
except China
Latin America 7
Middle East 5
Africa 3
1 Figures may not sum to 100%, due to rounding.

Source: McKinsey Global Institute; McKinsey Panorama
McKinsey & Company

Web <year>
<Title>
Exhibit 5 <x>
Exhibit 5 of
The spread between rates and inflation reached a 40-year high in the US
The spread
and Europebetween
in 2022.rates and inflation reached a 40-year high in the US
and Europe in 2022.
Comparison of interest rate and inflation, Europe and US1
Eurozone US
18 18
16 16
14 14
12 12
10 10
Inflation3 8 Inflation3
8
6 6 7pp
8.9pp
4 4
2 2 Interest
0 Interest 0 rate2
rate2
-2 -2
1970 1980 1990 2000 2010 2022 1970 1980 1990 2000 2010 2022
To June 2022.
1
2
Short-term interest rates (Federal funds effective rate for US and marginal refinancing rate for eurozone).
3
Inflation rate is annual % change in consumer prices, US – CPI by Bureau of Labor Statistics, Euro area – HICP.
Source: ECB; Federal Reserve Economic Data; OECD statistics; World Bank
McKinsey & Company

China’s property crisis and its implications for banking
China’s real estate crisis has put growing that one in five rated Chinese developers crisis. The banking system as a
pressure on Chinese banks. To what extent could be insolvent. whole is healthy; there are no signs
can the rest of the global economy remain of explosive growth in lending. The ratio
This has led to a vicious cycle seen typically
insulated from the crisis? of nonperforming loans is low. Exposure
in crises. As asset prices increase
to external shocks also is low, with
Chinese real estate: The significantly above what is affordable,
a low foreign-debt rate and stable
scale of the asset class demand declines. Developers with
international-portfolio inflows and outflows.
significant leverage and higher exposure
Valued at $60 trillion, the Chinese property This allows the government to step in as
to external debt default on their debt
market is the single largest asset class in needed to help the financial intermediation
obligations and are unable to deliver projects
history, about double the size of the US system in case of shocks by leveraging
as promised. This scenario is playing out in
residential mortgage market and much its massive balance sheet. A very high
China, which this year is additionally facing
larger than the US bond market. It also plays household savings rate of 45 percent
supply chain shocks related to raw
a major role in the economy, with almost 30 also will help this process.
materials and a tighter financing market
percent of value added linked to the property
locally and globally. This, in turn, has led In the medium term, the central challenge
market, accounting for 45 percent of total
to further reduction in demand and a remains the extent and pace of economic
Chinese debt and an estimated 54 percent
consumer boycott of mortgage payments, growth. Given unfavorable demographics,
of household debt.
which further exacerbates the situation. lack of momentum, and high levels of debt
Recent issues with the sector in the system, the rest of the world likely
For the Chinese economy, there is one
cannot depend on China as a core growth
However, real estate prices in China are additional major factor to consider. The
engine. Global suppliers to China have been
out of sync with prices elsewhere, even in growth of the economy over the last couple
adversely affected. Already this year, other
markets that have seen massive valuation of decades has been investment led.
Asian economies have grown faster than
increases in recent years (for example, the Significant investments in infrastructure,
China. This outlook is likely to change only
United States and the United Kingdom). A including roads and highways, have been
if China’s economy manages to pivot from
median apartment in China in mid-2022 cost made by local governments that have used
investment-led to consumption-driven
the equivalent of 31 years of median sale of land to property developers
growth very quickly. While this seems to have
disposable income, compared with eight as a source of funding. Lower demand from
featured in the policy agenda, it has not been
years in the United States and nine property developers could have a further
as easy to implement on the ground. The
in the United Kingdom. impact on economic growth over the
evolving political environment and the extent
medium term.
The sector has been under stress because of the pivot to consumption will define
of inflated asset prices and the resulting Potential implications for China the course of the Chinese economy over
impact on supply. About 30 Chinese real and the global economy the next few years.
estate companies have missed foreign-debt
In the short term, despite inflated asset
payments. Last year, one major developer,
prices and early defaults, the Chinese
Evergrande, defaulted on $300 billion in
economy appears well equipped to avoid a
debt. The S&P ratings agency has warned

These shocks are playing out in different In previous years, there might have been a tendency
ways across and within regions, notably to lump together these country and regional variations
including emerging markets and describe them in classic terms as emerging
The banking story we have sketched so far is of a markets versus advanced economies. This year, that
sector seeking to find new paths to longer-term division no longer holds—and indeed, it’s possible
profitability and growth and facing severe challenges to make the case that, in banking at least, the whole
even as it experiences a reprieve, thanks to higher notion of “emerging markets” is dead (Exhibit 6). That’s
margins. While that is the case for the sector globally, because the group of countries to which it refers
one of the striking characteristics of this period is that is no longer monolithic: some of the best-performing
some banks in some geographies are doing very well and high-growth banks are to be found in Asia,
indeed, growing robustly and posting buoyant and as are some of the worst-performing and
rising profits and revenues. lowest-growth ones.
This far more upbeat picture is to be found in certain The divergence isn’t just limited to developing nations
parts of the US and Canadian banking sectors—in but also applies to advanced economies, where
particular, regional banking in the United States and healthy institutions in the US banking sector are
top five banks in Canada. It is also to be found in some at odds with languishing ones across Europe.
emerging economies, including India, Indonesia,
and Mexico, where the largest banks by market
capitalization are performing very well. Indeed, India’s
leading banks have among the highest valuations in
the world (see sidebar “India’s leading banks thrive
on innovation”).
Web <2022>
<GBAR2022>
Exhibit 6
Exhibit <3> of <7>
For banking, the line between developed markets and emerging markets has
For banking,
become the distinction between developed markets and emerging markets
blurred.
has become blurred.
Price-to-book (P/B) value, by market type Return on equity and P/B, by market type
24
Bubble size = book
Emerging
value of banks
3
20
China
2 Return on
equity US
2021, % Canada
10
UK India
1
Developed
0 0
0 1.0 2.0 2.4
2005 2010 2015 2020
Price to book 2022
McKinsey & Company

India’s leading banks thrive on innovation
Most Indian banks trade, on average, at only banks continue to focus on scaling their Digitizing corporate engagement has
slightly higher than the global average. But businesses, they are attempting to put in resulted in significant increases in
the country’s three largest banks stand out— place prudent risk management systems. In engagement, volumes, and deposit balances.
not just in India but also globally for their addition, they are applying state-of-the-art
HDFC Bank was among the first banks
consistent outperformance. They trade at analytics capabilities to constantly improve
globally to offer loans that are preapproved
a premium of 2.5 price to book (see exhibit). their decision making and risk management.
in ten seconds. This bank also curates
And the innovation that has helped them
Innovation has been their strongest suit, best-in-class offers for affluent
achieve this stellar performance can serve as
with a focus on bringing market-first capa- consumers via a loyalty and rewards
a lesson to many other banks worldwide.
bilities to customers. ICICI Bank made bold platform—for example, offering the best
All three have pivoted strongly to retail cus- bets by establishing ecosystem platforms deal in the market for every new release
tomers since the early 2000s, moving away for retail, small-business, and corporate of an Apple product. Moreover, the scale
from corporate lending, which had lower customers. This paid off immensely; retail of growth seen in the market is enormous.
margins. They focused on building a strong banking customers of other banks pre- State Bank of India (which is the largest of
deposit franchise before acquiring new lend- ferred making payments via the bank’s app, the three but trades at a lower multiple than
ing customers, and they took some counter- enabling significant new-to-bank customer the others, partly because it is state owned)
intuitive bets, such as entering markets other acquisition and cross-selling. The state-of- acquired 1.7 million customers in June 2022
banks were exiting. For example, HDFC the-art mobile-first digital offering for small via YONO—its ecosystem offering for retail
Bank entered credit-card lending just after businesses with integrated beyond-banking customers—nearly doubling numbers from
the global financial crisis. As these leading services led to significant deposit growth. the previous year.
Web <year>
Exhibit
<Title>
Exhibit 7 of <x>
India’s topbanks
India’s top banksoutperform
outperform both
both globally
globally andand locally.
locally.
Price to book vs return on equity Price-to-book spread: Top 3 banks1 and rest
of the market
Difference in price to book between Top 3 banks

top banks and the rest of the market Rest of the market
Price to book, H1 2022
3.0
3.0
2.5
India (top 3 banks)1 2.5
2.5
North America
2.0 2.0
Emerging Asia
1.5 Middle East/Africa 1.5
Latin
Rest of India America
1.0 1.0
Developed Asia
0.5 0.5
Europe China
0
0 2 4 6 8 10 12 14 16 India Vietnam Canada US UK China France
ROE, 2021 %
1
Top 3 banks by assets.
McKinsey & Company

As the economy slows, the divergence Two economic scenarios and their impact
between banks will widen further on banks: How bad (or good) might it be?
The current uncertain macroeconomic outlook will We have modeled the effects on banks of two possible
affect banks in two ways, albeit to different degrees. macroeconomic scenarios created by our colleagues
First, there is likely to be a continuing boost to at the McKinsey Global Institute (Exhibit 7). The two
profitability from higher margins as interest rates scenarios are inflationary growth and stagflation. In
increase—but this may only prove transitory. Second, the inflationary-growth scenario, the inflation rate
banks face a long-term growth slowdown. Outcomes remains higher over the next year but is kept in check
will vary considerably from bank to bank, depending by monetary policy: interest rates rise and continue
on three factors: their funding profile, geography, rising through 2025. Economic fundamentals remain
and operating model. Banks whose key customer strong, and nominal GDP is not severely affected.
segments are vulnerable to macro shocks will feel the In the stagflation scenario, monetary policy fails to
biggest impact. keep inflation in check. Interest rates rise but not by
enough to tame price rises. After falling into negative
The net result of these pressures will be an increase
territory, real GDP growth returns but is muted, and
in the “great divergence” trend among banks that
there are persistent growth bottlenecks, such as
we noted last year in our 2021 Global Banking
inability to move to a new energy infrastructure.
Annual Review. Banks as a whole will continue to be
undervalued compared with other sectors, but here
too, the differences between banks will become even
more pronounced, depending on geography and type
of institution.
Web <year>
<Title>
Exhibit 7 <x>
Exhibit 7 of
The uncertainty on the state of the economy may unfold in two different
The uncertainty
scenario on the state of the economy may unfold in two different
frames.
scenario frames.
Scenario 1: Inflationary growth Scenario 2: Recession/stagflation
CPI1 (YoY) Real GDP growth (YoY) Interest rate (yearly average)
8 8
6 6
4 4
2 2
0 0
-2 -2
2021 2022 2023 2024 2025 2026 2021 2022 2023 2024 2025 2026
Global banking ROE, %

Inflationary growth Recession/stagflation
15 12 15 12
10 11 10 9 10 10
10 9 10 8 8 7
5 5
0 0
2021 2022 2023 2024 2025 2026 2021 2022 2023 2024 2025 2026
1 Consumer price index.

Source: Expert interviews; McKinsey Global Institute in partnership with Oxford Economics
McKinsey & Company

In either scenario, we expect the initial stage to be The divergence story will continue to play out through
positive for banks. Rising interest rates will lift net these scenarios. Banks in Asia–Pacific may gain
interest as short-term lending products such as from a stronger macroeconomic outlook, whereas
consumer finance are repriced faster than liabilities. European banks may see the full effects of the
Global banking revenues are likely to see an increase scenario sooner and with more detrimental impact. In
of 5 to 6 percent in 2022. New mortgages may be the event of a long recession, we estimate that return
offered at price points that anticipate rate increases on equity globally could fall to 7 percent by 2026—and
before they have happened. below 6 percent for European banks.
In this phase, both scenarios forecast that costs and The net impact will likely be a further concentration
risks remain under control; for example, 30 percent of of growth in Emerging Asia, China, Latin America, and
banks in Europe still wrote back COVID-19 provisions the United States. We expect that these regions will
in the first half of 2022. Talent costs have been account for about 80 percent of the estimated
rising, however, and that trend could continue. Global $1.3 trillion in global banking revenue growth
banking return on equity would rise to approximately between 2021 and 2025.
12 percent in 2022, two percentage points more
The type of bank will be another major differentiator.
than in 2021.
Deposit-rich franchises may gain most from higher
The big question is what will happen after the initial rates leading to better yields on low-cost liabilities.
stage—that is, during a transition phase when By contrast, lending portfolios would have to endure
economic growth deteriorates, followed by a phase the double impact of higher cost of funds and higher
when the full effects of the scenario kick in. Banks risk if economies fall into recession or are consumed
could see three effects—a slowdown in volume by stagflation. After the transitory spike in 2022 from
growth, higher costs, and greater delinquencies— higher margins, some 60 percent of revenue gain
which, depending on the scenario, could be small in the following years is likely to come from wealth
or large. management services, deposits and payments,
and transaction banking (Exhibit 8).
Start with volumes. Payments, transactions, saving,
and investment will slow in a recession, and higher
rates will likely deter auto loans, mortgages, new bond
issuances, and IPOs. Costs will rise with inflation.
Beyond talent, many other categories, such as
technology and branch operations, will be affected.
Finally, if recession bites hard, banks’ customers will
suffer. Some will default, and many others will need to
restructure their loans. Markets are factoring in these
uncertainties; valuations remained depressed in the
first half of 2022 despite positive margin news from
most banks.
We expect Emerging Asia, China, Latin

America, and the United States to account
for about 80 percent of the estimated
$1.3 trillion in global banking revenue
growth between 2021 and 2025.
Web <year>
<Title>
Exhibit 8 <x>
Exhibit 9 of
As banking growth shifts to new geographies and with higher interest rates,
As banking growth shifts to new geographies and with higher interest rates,
liabilities become more profitable.
liabilities become more profitable.
Banking revenue historical growth (2017–21), 1 $ billion
CAGR <0% 0–3% 3–6% >6%

Retail banking Wholesale banking
Country Consumer Mortgage Deposits and Brokerage3 Transaction Financing4 Total5
financing payments2 banking
North America 40 74 −16 28 –2 52 176
Western Europe
3 13 −11 8 10 27 49
except UK
United Kingdom –1 5 3 –1 –4 15 16
Japan 1 3 −10 –2 –10 –2 –20

Developed Asia
except Japan 0 6 −6 3 0 11 14
Emerging Asia
22 9 1 6 7 21 65
except China
Latin America 25 10 4 2 11 13 66
Africa 4 1 3 0 5 6 18
Middle East 1 2 0 0 1 5 9
China 67 62 14 29 99 167 438
World 160 185 –19 74 116 316 832
Banking revenue forecast growth (2021–25), 1 $ billion
CAGR <0% 0–3% 3–6% >6%

Retail banking Wholesale banking
Country Consumer Mortgage Deposits and Brokerage3 Transaction Financing4 Total5
financing payments2 banking
North America 70 20 82 37 60 31 300
Western Europe
5 6 23 10 22 4 68
except UK
United Kingdom –4 0 5 1 9 –4 7
Japan 3 2 0 1 2 3 11
Developed Asia
except Japan 4 3 13 4 21 10 55
Emerging Asia
25 8 39 5 31 19 128
except China
Latin America 32 5 22 5 24 8 96
Africa 5 1 4 1 8 8 27
Middle East 1 3 3 0 5 3 16
China 76 43 91 36 207 100 554
World 218 90 282 99 388 183 1,261
1
Revenues after risk cost, estimated change. 2Includes revenues for CA deposits. 3Includes distribution of mutual funds, insurance, and pension funds. 4Includes
specialized finance. 5Totals do not include CMIB, micro lending, and asset management.
Source: McKinsey Global Banking Pools; McKinsey Panorama
McKinsey & Company

What didn’t change in 2022: Banks continue to and the risks to banks if the global economy goes
trade at a growing discount to other sectors into recession.
Banking as a sector is valued substantially below other
Between banking and other sectors, only about half
industries, a reflection of the stark legacy challenges
of the valuation gap is a reflection of the banking
that traditional banks face. About half of all banks are
industry’s low profitability (Exhibit 9). The other
net destroyers of value, and many of the others are
half reflects the expected lack of future growth,
weighed down by prospects of slow growth and low
demonstrated by banks’ low P/E ratios. Banks have
expectations for profitability.
P/Es of about 13, compared with an average of 20
Total global market capitalization peaked in 2021 for other sectors—and the discount has been growing.
at $16 trillion and dropped back to $14.5 trillion by Banks lack systematic growth perspectives for the
May 2022. Half of this valuation is represented by sector overall, leading investors to discount the sector,
traditional banking institutions, while specialists which lacks the growth premium observed in other
and fintechs represent the other half—up from a 30 industries.
percent share five years ago.
Within this overall gloomy picture are some much
The gap in valuation between traditional banks and brighter spots. Indeed, in looking at banking in 2022,
fintechs remains large, even if the 2022 downturn in we can fit banks into one of three categories. First are
crypto and BNPL brought fintechs down from their the ones we are calling the North Stars (Exhibit 10).
highs. Prices factor in both the recovering margins
Web <2022>
<GBAR2022>
Exhibit 9 of <7>
Exhibit <4>
The valuation gap between banking and the whole economy widened in 2022,
with half spurred
The valuation by profitability,
gap between bankingthe
andrest
the by low-growth
whole economyoutlook.
widened, with half
driven by profitability, the rest by low growth outlook
Price-to-book ratios
All other industries

3
Sources of gap, %
48
Reduced profitability
2 ~70% gap
52
Impaired-growth outlook
1
Banks
0
2005 2010 2015 2020
McKinsey & Company

Web <year>
Exhibit
<Title> 10
Exhibit 11 of <x>
Only oneout
Only one outofofsix
sixfinancial
financial institutions
institutions demonstrate
demonstrate potential
potential for long-term
for long-term
value creation.
value creation.
Financial institutions ranked by price to earnings vs price to book
% of institutions in the sample Average P/B of the sample Average P/E of the sample
High
Expected to destroy value North Stars: Long-term
value creation
15
3.8
23
50
Price to
earnings1 Short-term value creation
0.6 6.0
35
1.4
Low
Low Price to book2 High
Note: Analysis based on a sample of more than 1,000 institutions.

1Price to earnings of 15 defined as the threshold for differentiating high and low.
2Price to book of 1 defined as the threshold differentiating high and low.
McKinsey & Company
These banks perform well in terms of both high returns both high growth and high profitability.
today and future growth. Their high P/Es imply high
So much for the good news. In our annual banking
expectations for long-term growth, while their high
review last year, we identified about half of banks
price-to-book ratios (P/Bs) reflect risk-adjusted
as value destroyers. This year, by looking not just at
short-term profitability. These banks are a relative
profitability but also at growth, we find that in addition
rarity: globally, only about 15 percent of banks qualify
to this 50 percent, which are destroying value now and
as a North Star. Their valuations are two to five times
are expected to continue doing so in the future, another
higher than others.
35 percent are currently creating value but are not able
Traditional banks represent just 39 percent of all the to grow sufficiently to ensure they will continue doing so.
banks we call North Stars, and they are concentrated in These are banks with high P/Bs but low P/Es. In other
North America, Emerging Asia, and the Middle East and words, they are profitable now, but over the longer term,
Africa (Exhibit 11). This means that the majority of North the expectations for future growth are not bright. These
Stars are specialists with a focused business model. banks, which include many of the largest in the world,
These institutions are more geographically diverse, with must radically reinvent their business model to find
concentrations for certain sectors; for example, North systematic growth opportunities in banking (or beyond),
American payments providers and consumer finance in order to build up a growth premium and protect
and other specialists from Emerging Asia demonstrate their future sustainability.

Web <year>
<Title>
Exhibit
Exhibit 12 11
of <x>
Traditional banks represent only 39 percent of North Star institutions

Traditional banks represent only 39 percent of North Star institutions.
Regional distribution, % Share of
North Stars
North America
Payments 71 7 14 7 8%
China
Developed Asia
Financial exchanges 33 27 20 7 7 7 9%
Emerging Asia
Corporate and 5 Europe
30 15 10 15 20 11%
investment banks 5 Middle East and Africa
Consumer finance and Latin America
11 25 54 4 7 16%
other specialists
Asset management 26 23 19 26 3
18%
3
Traditional banks 51 4 22 1 18 3 39%
McKinsey & Company
Four dimensions differentiate banks’ the months ahead, they face intensified pressure
performance: Geography, specialization, from a potential recession.
customer segmentation, and scale
By contrast, many Asian banks have higher valuation
To understand why and how banks end up where
premiums. About 25 percent of Emerging Asia banks
they do in Exhibit 10, we looked at them across four
are valued at 1.5 times their book value or above, in
dimensions: geography, specialization, customer
part because of fast-growing economies and their
segmentation, and scale. This more detailed analysis
innovative practices. P/B and ROE are also strong
is a refresh of the analysis in our annual banking report
in the Middle East, Africa, Latin America, and
for 2021, in which we highlighted the importance of
North America.
business model as a way to understand the growing
divergence in bank performance.4 Specializing can be profitable. The second
dimension we focus on is a bank’s specialization. The
Geography is a key factor. For this report, we
analysis here shows that well-valued specialist players
analyzed the deviation in banks’ P/Bs across the last
and fintechs are—not surprisingly—active in banking
decade, using a standard regression model to estimate
products that generate profits, including deposits,
the key drivers behind variation in P/B, either from
payments, and consumer finance. The result is a
banks’ primary business location or because of other
two-speed system in which traditional banks are left
factors, including management, operations, and all
behind (Exhibit 13). This was still true after the market
the other levers that banks command. This analysis
correction in 2022, which did not change the order
clearly highlights geography as one of the key factors
or magnitude of difference.
in a bank’s valuation (Exhibit 12). Overall, we find that
a bank’s primary business location now accounts for Overall, the banking system destroyed about
68 percent of its valuation, a share that has been rising $120 billion in economic value in 2021, with a return on
consistently since 2014. At the same time, as we have equity that failed to match its cost of capital. But the
seen in the India example, bank performance can also divergences were very large across areas of banking
diverge strongly within a country or region. specialization. Capital-heavy businesses, including
mortgage lending and corporate banking, earned
Last year, many banks in Europe were already
returns on equity of less than 7 percent, whereas
unprofitable; only 25 percent of the 300 largest
everyday banking, payments, and wealth management
European banks were valued above book in 2021. In
earned returns exceeding 20 percent.
4 See also, “The chessboard rearranged: Rethinking the next moves in global payments,” McKinsey, October 7, 2022; “Reshaping retail banks:
Enhancing banking for the next digital age,” McKinsey, October 12, 2022.

Web <year>
<Title>
Exhibit
Exhibit 13 12
of <x>
Geography is back as a major driver of valuation.

Geography is back as a major driver of valuation.
Standard deviation,1 price-to-book ratio Price to book, ROE, 2021,
H1 2022 %
Other factors North America 1.3 13

Growth from primary business location
Europe 0.6 7
27
35 32 Developed Asia 0.7 6
51
China 0.5 10
Emerging Asia 1.7 10

73 68
65
49 MEA 1.5 13
Latin America 1.5 14

2010–11 2014–16 2019–20 2021–22
Ø0.8
1We analyzed the deviation in banks’ price-to-book ratio (P/B) across the last decade, using a standard regression model, to estimate the key drivers behind
variation in P/B, from either primary business location for banks or other factors, including management, operations, and all the other levers that banks
command.
Source: S&P Global, McKinsey Panorama
McKinsey & Company
Web <2022>
Exhibit 13
<GBAR2022>
Exhibit <5> of <7>
Specialized playerscontinue
Specialized players continuetototrade
tradeatata premium
a premium relative
relative to traditional
to traditional banks.
banks.
Market capitalization and price-to-book ratio, by banking sector
10
2020
Traditional Niche Asset Consumer Financial Payments
banks CIB¹ management finance exchanges H1 2022
and other
specialists Circle size =
total market
8
capitalization,
$ billion
6
Price-to-
book ratio
9.0×
4.5×
4 Average 3.2×
1.7×
traditional
banks 2.1×
2
¹Corporate and investment banking.

Source: McKinsey Panorama; S&P Global
McKinsey & Company

Nine of the ten largest bigtech and fintech players are The dual challenge: Managing the
focusing on these high-profit segments. For many present while preparing for the future
years, fintechs tended to be rather subscale, but today What can banks do in the face of these dual short- and
we see multiple scaling success stories, including long-term challenges? The current macroeconomic
Revolut (with a $33 billion market cap and more volatility and uncertainty seem unlikely to dissipate
than 20 million customers) and Nubank ($45 billion anytime soon. Over the next five to ten years, market
valuation and 70 million customers), to name two. pressures and shifts expected in banking, including
Building on success in their home markets and using technological changes that disrupt traditional banking,
a digital banking model that covers multiple products, will amount to fundamental structural breaks. It is
these fintechs have now expanded regionally critically important for banks to improve their
or even globally, following a step-by-step approach short-term resilience and invest in the long term in
to prioritize markets for international expansion. order to innovate and prepare the path for future
profitability, increased growth, and higher valuations.
Take a fresh look at customer segments and
Several actions can equip banks for the short-term
demographics. For customer segmentation, the
challenges and the longer-term imperatives.
third differentiating dimension, most universal
banks without a specific segment focus can end up Take bold steps now to build short-term resilience
with a client profile that matches the demographic Resilience in the short term is the key to emerging
distribution. However, our analysis suggests that, in from the current volatile period in a strong enough
retail banking, disproportionate revenues tend to be position to ensure future growth and profitability. That
locked in specific segments. One notable feature of means putting a strategic focus on four objectives.
this analysis is the gap between the demographic
The first objective is financial resilience. To navigate
distribution of the population and the age at which
tumultuous macroeconomic and geopolitical
they generate banking revenue. For example, in the
conditions, banks should pursue an optimized balance
United States, banking revenue peaks among people
sheet and capital positions by collecting deposits and
between the ages of 60 and 70, which is about 40
by reallocating and repricing loans. The
years after the demographic peak. In China, the trend
best-performing banks will have a net income
is reversed: the revenue peak arrives 20 years before
structure with low sensitivity to interest rates and risk
the demographic peak (Exhibit 14). The takeaway
costs, and should target a cost-to-income ratio
for banks is that there is no generic formula for how
of 35 to 40 percent.
sociodemographic trends such as demographics
affect financial needs and business potential. Banks Second is operational resilience. That means reducing
thus need to take a hard look at their customer or eliminating a presence in high-risk countries and
segments—since traditional cuts such as mass versus building exceptional risk management practices.
affluent can be overly simplistic—and develop a
Third, banks need digital and technological resilience.
granular segmentation that takes into account age,
Cyberattacks remain a serious risk, and the best banks
income, and other social or behavioral aspects, such
have a well-protected and future-proof technology
as digital fluency.
infrastructure, and superior data security.
Scale matters. The fourth and final dimension is that
Fourth is organizational resilience. How agile is the
of scale. About 70 percent of market capitalization is
decision-making process and the enterprise as
held by banks that have a P/B of higher than 1 (which
a whole? Banks that perform best will have rapid
is about half of all banks)—even though they account
reaction times and invest in attracting, reskilling,
for only 30 percent of assets. Only 10 percent of
and retaining the best talent.
these banks are already at scale, and they represent
a market share of at least 10 percent; the rest of these Lay the groundwork for long-term growth
“value-creating” banks could benefit from M&A to Facing a complex and fast-changing environment, and
increase their scale.5 Such marriages can also help a relatively higher return on equity in 2022, now is the
improve the performance of the other 50 percent of time for banks to invest in addressing the structural
banks, those that are destroying value, which control issues in their business models, and in revitalizing
some 70 percent of assets. long-term profitability and valuations.
5 Clara Aldea Gil de Gomez, Robert Byrne, Sean O’Connell, and Igor Yasenovets, “Strategic M&A in US banking: Creating value in uncertain times,”
McKinsey, November 8, 2022.

Web <year>
Exhibit
<Title> 14
Exhibit 14 of <x>
Population demographicsdiverge
Population demographics diverge from
from banking
banking sources
sources of revenue,
of revenue, indicating
indicating the
the importance
importance of segment-focused
of segment-focused banking
banking propositions.
propositions.
Share of revenue and population by age group, 2022, %
Share of revenue Share of population1 XX years Difference between revenue and population distribution modus
China US
35 –20 years 35 +40 years
30 30
25 25
20 20
15 15
10 10
5 5
0 0
18–30 30–40 40–50 50–60 60–70 70+ 18–30 30–40 40–50 50–60 60–70 70+
Netherlands Kenya
35 Balanced 50 +20 years
30 40
25
20 30
15 20
10
10
5
0 0
18–30 30–40 40–50 50–60 60–70 70+ 18–30 30–40 40–50 50–60 60–70 70+
1Having an account at any type of financial institution or using a mobile money service with minimum age 15.
Source: McKinsey Panorama
McKinsey & Company
In our annual banking review last year, we posed a set leverage their data. Advanced analytics can play
of questions aimed at stimulating banks’ thinking as an important role here, but data management
they craft a strategy for a world of growing divergence. systems will need to be mature enough to
The past few volatile months have shown just how provide the foundation for a robust data analytics
necessary such a strategy is. Banks will need to move operation. In our experience, leading banks have a
from traditional business models to more future-proof clear data and analytics strategy and a good data
platforms, potentially decoupling different business architecture with strong governance; true leaders
units such as everyday banking and complex financing go further, to the point where business decisions
or advisory services. There are several key approaches are fully based on data—with fully 40 percent
to consider: or higher of the employee base dedicated
to analytics and digital, frequently by reskilling
— Fostering highly differentiated customer
existing employees.
relationships with a strong focus on establishing a
deep emotional connection. One way to measure — Making substantial and clear bets when allocating
success here is to determine how many customers resources and capital, with an eye on managing
are using value-added services beyond banking— economies of scale. Leading banks reallocate more
banks should aim for a figure greater than 60 than 10 percent of their capital every year—and the
percent. Customer satisfaction scores are also deal value of acquisitions can exceed 40 percent
a good indicator, and a top ranking in a bank’s of their banking net income.
market should always be the goal.
— Creating new customer access and revenue
— Developing proprietary data and insights on sets sources. Successful banks focus on value-added
of customers. Banks have an abundance of data services that generate deep customer involvement
about their customers and most can do more to and sustainable fee revenues, such as subscription

fees, payments fees, and distribution fees, that beyond-banking platforms for multiple ecosystems,
do not involve the balance sheet. To truly stand including mobility, housing, education, health, wealth
out from competitors, banks should aim to derive and protection, and public services. The bank also
more than 50 percent of banking income from launched a loyalty program that connects deeply with
these fee sources. For banks, the opportunity is to customers. In Europe, one of the best-performing
leverage their massive customer base, go beyond banks over the last decade is Hungary’s OTP, with a
traditional banking offerings, and increase revenue price to book consistently higher than the average
by providing value-added services via digital for banks in the region. It has excelled in building
platforms. Leading banks, in fact, will derive beyond-banking offers and new revenue sources via
more than 20 percent of revenues from a payments application and has expanded throughout
nonbanking sources. Central Europe. Besides these banks, many local
fintechs are developing applications and marketplaces
— Focusing on innovation with the goal of instilling
at scale; two examples are Kaspi in Kazakhstan
a truly entrepreneurial culture and attracting and
and Yape in Peru.
retaining the talent needed to contribute within
such a culture. That will require staff dedicated to Whether they are large incumbents or up-and-coming
advanced analytics and digital and an enterprise- fintechs, all banking institutions are looking for new,
wide agility enabling a time to market for new scalable growth opportunities. Only one out of six
releases of two to four weeks, for true leaders. banks—the North Star banks we describe here—have
high growth and profitability outlooks. However, in
— Developing a strategy around environmental and
many cases, these banks have achieved this status by
social transformations. The next chapter focuses
gaining market share from lower-performing banks
in depth on this topic, but measures banks should
in market that is broadly stagnant. What systematic
track and improve in this area include ESG ratings
opportunities exist that can radically transform the
across the board, ESG issuance volumes, and ESG
growth outlook for the overall banking industry? In the
product coverage across a wide range of banking
next chapter, we look at one candidate: the burgeoning
segments.
field of sustainable finance, where the next era
Some of the leading banks mentioned in this chapter is dawning.
are already excelling in these areas. Among them
is DBS Bank in Singapore, which is successfully
achieving a high return from serving digital customers
and revenue growth, including from M&A in growth
markets. In 2022, DBS committed to achieving a
cost-to-income ratio close to 40 percent. Royal
Bank of Canada, which trades at about 40 percent
above its market price to book, successfully built
Successful banks focus on value-added

services that generate deep customer
involvement and sustainable fee revenues.

The next era for
sustainable finance
Sustainable finance is now a major topic for banks, and revenue potential of at least $100 billion annually
one that is wide in scope. In this chapter, we describe by 2030.6 Sizable revenues are also expected
how the market not only has grown robustly but also is from equity capital markets and advisory services,
entering its “next era.” Originally, sustainable finance transaction banking, and sales and trading, including
primarily involved financing renewable energy. In in nascent carbon markets.
this next era, it encompasses almost all business
Sustainable finance has become a
and industry sectors as they begin the profound and
meaningful share of bank business
capital-intensive transformation needed for a low-
emission future. The market for sustainable finance is growing, and
for banks, it now represents a meaningful share of
The term sustainable finance is often used loosely
business (see sidebar “A growing menu of sustainable-
in the context of the push to integrate ESG goals into
finance opportunities”). As sustainable instruments
corporate reporting. In this chapter, we use this broad,
gain acceptance, scrutiny of how they are labeled also
aggregated (and sometimes opaque) category to
increases. In particular, sustainability-linked loans and
describe market trends and the current state, since
bonds need to establish their credibility. More broadly,
it is the most readily available. But in discussing the
there is a need to disaggregate ESG categories
outlook for the next era, we focus more narrowly on
in order to distinguish and track climate finance
climate financing opportunities.
separately. Credibility and tracking will improve
The market for sustainable instruments has been with increasing standardization and transparency in
affected by the broader global slowdown, and baseline performance and progress against targets,
numerous challenges remain. They include perceived including emissions, energy mix, and resource impact.
and real greenwashing regarding the ultimate impact
of capital deployed, an uncertain economic outlook,
the current energy-security and cost-of-living crises,
and the pace of the transition to a lower-carbon
economy. Regardless of these challenges, we find
that policy shifts, technological advances, and the
growing focus of companies and financial institutions
on a sustainable future are combining to unlock large
value pools. We estimate that globally, debt-focused
investment supporting the transition could offer banks
6 For more information, see “The net-zero transition: What it would cost, what it could bring,” McKinsey Global Institute, January 2022. Estimates
based on McKinsey Transition Finance Model, McKinsey Global Banking Pools. Investment includes loans, bonds, and project finance in low-
emission assets.

A growing menu of sustainable-finance opportunities
Sustainable finance—including lending, Transition bonds. Transition bonds are Clean-energy project finance. These
M&A, and capital market products used issued by carbon-intensive organizations non- or limited-recourse loans finance
for ESG purposes—has expanded in recent with the intention to support clean-energy projects, including
years to include a wide range of instruments. decarbonization. low-emission generation, sustainable
At times, these are not clearly defined, fuels, and grid-scale storage, among other
Social bonds. Proceeds from social
which can make standardized measurement low-emission technologies.
bonds are applied to social projects, such as
difficult. Tracking and reporting tend to
promoting social welfare and creating
focus on the following categories of debt
a positive communal impact.
instruments:
Sustainability-linked bonds/loans. The
Green bonds/loans. Proceeds from these
terms of these fixed-income securities
debt instruments are applied to climate
are aligned with the issuer’s or borrower’s
and environmental projects.
sustainability performance targets to
Sustainability bonds. Proceeds from improve the company’s sustainability profile.
sustainability bonds are applied to (Key performance indicators for these
environmentally sustainable outcomes securities have not yet been standardized.)
of a combination of green and social projects.
Issuance of sustainable debt instruments, which was Still, sustainable debt capital markets and lending
close to zero five years ago, has seen substantial fared better than the debt market overall. For example,
year-on-year growth through 2021 (Exhibit 15). The syndicated loan volume overall declined by 16 percent
volume of sustainable bonds, including green bonds, between the first half of 2021 and the first half of
sustainability bonds, social bonds, and sustainability- 2022, while sustainable syndicated loans declined
linked bonds, reached $965 billion, up by 80 percent by just 2 percent in the same period.
from 2020. The volume of sustainable syndicated
Issuance of sustainable bonds currently accounts
loans, including green loans and sustainability-linked
for about 12 percent of total bond market volume,
loans, totaled $683 billion in 2021, up by more than
while sustainability-related syndicated loans are about
200 percent from 2020.7 Sustainable financing
13 percent of the volume for global syndicated loans
activities related to the capital markets—including
(Exhibit 16). The sharpest rise in issuance came
M&A, equities, and carbon trading—also have
during 2020, primarily driven by growth in
expanded over the past few years.8
sustainability-linked loan volumes, which tripled
The momentum slowed in 2022 amid the broader between 2020 and 2021, and green loans, which
market declines: sustainable debt instrument volume grew 71 percent between 2020 and 2021.
fell 17 percent between 2021 and 2022.
7 The lack of standardized definitions for what constitutes a “green” financial instrument may result in overcounting. For a list of instruments we
include, see sidebar “A growing menu of sustainable-finance opportunities.” Data from Dealogic database and McKinsey Global Banking Pools.
8 Data from Dealogic and IIF Taskforce on Scaling Voluntary Carbon Markets. Capital markets are not explored in depth because data availability and
transparency are limited.

Web <year>
<Title>
Exhibit 15
Exhibit 1 of <x>
Sustainable debtinstruments
Sustainable debt instruments saw
saw significant
significant growth
growth through
through FY 2021,
FY 2021, but growth
but growth slowed during the first nine months of 2022.
slowed during the first nine months of 2022.
Volume of global sustainable debt instruments,1 $ billion
1,648
497
181 1,031
189 353
735
98
236 78 119
452 81
149 47
48
208 605
245 145
147 66 46 8 383
149 23 22 4
125 35 13 129 151
10 9 3 13 35
2017 2018 2019 2020 2021 Q3 YTD 2022
CAGR, % Year-over year change, %

2017–21 Q3 2021–Q3 2022
Green bonds 41 –6
Sustainability bonds 111 –20
Social bonds 107 –52
Sustainability–linked bonds N/A –30
Green loans2 265 12
Sustainability–linked loans2 290 –9

1
Includes green bonds, sustainability and sustainability-linked bonds, social bonds, green loans, and sustainability-linked loans.
2Sustainable syndicated loans.
Source: Dealogic as of Oct 12, 2022
McKinsey & Company

Web <year>
<Title> 16
Exhibit
Exhibit 2 of <x>
Sustainabledebt
Sustainable debtinstruments
instruments are
are a rapidly
a rapidly expanding
expanding portion of global
portion
debt
of issuance.
global debt issuance.
Sustainable debt instrument market share, % of total volume
Sustainable bonds1 Sustainable syndicated loans2
20 20
15 15 13
12 12
11
10 10
6 5
4 3
5 3 5
2
1
2017 18 19 20 21 Q3 YTD 2017 18 19 20 21 Q3 YTD

2022 2022
Total volumes, $8.9 trillion $5.8 trillion
FY 2021
1
Includes green bonds, sustainability bonds, social bonds, and sustainability-linked bonds, as well as securitization products (ABS and MBS), which contribute
<5% of sustainable bonds’ total volume.
2Includes green loans and sustainability-linked loans.
McKinsey & Company
Sustainable debt is catching on instruments that draw and direct significant capital
Initially, green bonds dominated the sustainable debt toward the transition.
market. In 2018, they accounted for 37 percent of total
Europe has historically led issuance of sustainable
sustainable debt issuance, and from 2017 to 2021,
debt instruments; in 2018, it issued more than
they grew at a compounded annual rate of 41 percent.
80 percent of sustainable syndicated loans, including
However, sustainability-linked loans (SLLs) rose even
sustainability-linked loans. Since that time, North
faster from 2017 to 2021, growing by an average
America has gained an increasing share of the market
annual 290 percent and surpassing green bonds
for sustainability syndicated loans and sustainable
as a share of the sustainability debt market in 2021.
bonds (Exhibit 17).
SLLs are performance-based instruments that
SLLs are already being used in high-emissions sectors
tie interest rates to the achievement of defined
for power producers and industrials. For example,
sustainability targets. Challenges remain in setting
the Asian Development Bank will provide $150
goals, including incentives for meeting the targets
million toward an SLL to decommission coal plants
set and penalties for failing to do so. They provide
in Indonesia,10 and JPMorgan and ING acted as
more flexibility than “use of proceeds” instruments
structuring agents for US Steel’s $1.75 billion asset-
like green bonds, which can only be used for specific
based sustainability-linked credit facility.11
earmarked projects that are aligned with guidelines
such as the Climate Bonds Taxonomy.9 If standards
for setting high-impact metrics and assessing
SLL performance are rigorous, these could be the
9 “Climate Bonds Taxonomy,” Climate Bonds Initiative.

10 CIF Accelerating Coal Transition (ACT): Indonesia Country Investment Plan, Government of Indonesia, October 3, 2022.
11 “US Steel extends sustainability-linked ABL credit facility,” Business Wire, June 1, 2022.

Web <2022>
Exhibit 17
<GBAR2022>
Exhibit <6> of <7>
Sustainable-debt
Sustainable instrumentsemerged
debt instruments emergedin in Europe
Europe before
before proliferating
proliferating globally,
globally,
most notably
most notablyininNorth
NorthAmerica.
America.
Total sustainable syndicated loans
Developed Asia Emerging Asia Europe Latin America Middle East and North Africa North America
Loans,¹ $ billion Loans,¹ %

683
700 100
600
80
500
431
400 60
300
40
197
200
150
20
100
48
0 0
2018 2019 2020 2021 Q3 2022² 2018 2019 2020 2021 Q3 2022²
¹Includes green loans and sustainability-linked syndicated loans, with sustainability-linked syndicated loans making up 75–90% of each year’s total volume.
²Year to date.
McKinsey & Company
Financing for clean-energy reached record highs Banks saw a 38 percent decline in clean-energy
in 2021, then slowed project finance volume in the first half of 2022,
Strong and sustained growth in solar energy projects largely because of declines in solar and wind projects.
sent the volume of clean-energy project finance to However, sustained growth in clean-energy project
record highs of $164 billion in 2021, of which $77 billion finance is expected to close the gap between current
came from solar projects alone.12 For overall clean- renewable generation and the amount needed for the
energy project finance, the annual average growth rate energy transition, because the decline was likely the
since 2017 has been 19 percent (Exhibit 18). short-term result of a confluence of external factors,
rather than a reflection of changing sentiment among
Solar and wind financing dominate the market globally.
financiers. Factors noted in chapter 1, such as the
Both onshore wind and solar financing were strong
broader economic slowdown, supply chain disruption,
in Europe and North America relative to other regions
and the energy crisis triggered by the war in Ukraine,
between 2017 and the first half of 2022, together
affected renewable project finance, as did the threat
representing more than 60 percent of solar and
of US antidumping and anti-circumvention tariffs
onshore wind markets. While renewables financing
on solar goods from Southeast Asia.14
has risen globally, Latin America and the Middle East
appear slower to embrace the trend than Asia.13
12 Clean-energy project finance includes project finance for solar, wind, batteries, biofuels, biomass, carbon capture utilization and storage (CCUS),
energy storage, electric vehicles, geothermal, hydrogen, hydro-water, waste management, and other renewables.
13 IJ Global Project Finance & Infrastructure Journal database as of October 10, 2022.
14 One study found that global loan spreads for solar PV were 20 percent lower in 2015–20 than in 2010–14. See Xiaoyan Zhou, Christian Wilson, and
Ben Caldecott, The energy transition and changing financing costs, Oxford Sustainable Finance Programme, University of Oxford, April 2021.

Web <year>
<Title>
Exhibit 18
Exhibit 4 of <x>
Clean-energyproject
Clean-energy projectfinance
finance slowed
slowed in the
in the first
first ninenine months
months of 2022,
of 2022, after
after sustained growth.
sustained growth.
Clean-energy project finance, funding volumes,1 $ billion
Others2 Offshore wind Onshore wind Solar

+19% per year
180 164
160 151
38
140 29
120 112 110 24
100 12 8 36
82 19 25
80 30 76
12 29
60 12 39 23
32 4
40 26 77 14
57
20 31 38 43 35
0
2017 2018 2019 2020 2021 Q3 YTD 2022
1
Funding volumes include total value (debt and equity) of transactions closed in the given year.
2 “Others” include a variety of transition technologies, eg, batteries; biofuels; biomass; carbon capture, utilization, and storage; energy storage; electric vehicles;
geothermal; hydrogen; hydropower; waste management; and other renewables.
Source: IJ Global Project Finance & Infrastructure Journal database as of Oct 10, 2022
McKinsey & Company
Financing for clean energy is also becoming more Banks are also beginning to explore emerging
competitive as a diverse and well-capitalized set of technologies such as hydrogen and storage. For
players, including asset managers, infrastructure now, investors are providing most capital flows for
funds, and institutional investors, pile into the market. new climate solutions, but as these projects scale,
Private-equity firms invested $76 billion in renewable banks will be increasingly involved. Ensuring sufficient
energy, sustainable mobility, and carbon technologies government support, demand, and contracted offtake
in 2021, more than doubling investments since 2017. for projects—that is, agreements to sell the power—is
Venture capital firms nearly quadrupled investments in critical for the feasibility and continued expansion of
the same technologies during the same period.15 bank financing for emerging technologies.
Banks are shifting how they finance clean energy Funding for clean energy through the equity capital
markets continues to see steady growth, mostly in the
As transition technologies like solar and wind mature,
power and utilities sector. The total volume for IPOs,
developers are refining how they bid to account for
follow-ons, and convertible bonds has risen by an
different risks and durations of contracts. Banks
annual average of 33 percent through 2021,
must change as a result: they are lending for shorter
from $11.2 billion in 2017 to $34.7 billion by 2021.17
periods, aggregating project portfolios to increase
Merger and acquisition activity has remained on a
ticket size, and playing a structuring role to earn
lower growth trajectory of about 5 percent annually.18
incremental fees. With this greater involvement, banks
are exposed to more volatile wholesale electricity Banks are also financing clean energy through
markets, as long-term power purchase agreements their retail businesses. For example, McKinsey has
become scarcer. 16 estimated that the residential solar financing pool
15 PitchBook data for venture capital and private-equity deal transactions as of the first half of 2022.
16 “Merchant tails on renewable assets a growing concern for power finance sector,” S&P Global, February 14, 2020.
17 Clean-energy equity market volume is calculated using keyword search in the Dealogic database. Keywords include renewable, sustainable,
biomass, waste management, clean energy, biofuel, cleantech, sustainability, clean water, EV.
18 Dealogic M&A database.

for banks was around $40 billion in 2021, up from generation and shifts to other decarbonization
$14 billion in 2017.19 Banks are also packaging loans enablers. In Germany, for example, the government
through securitizations; for example, Goldman Sachs is expediting power decarbonization, setting a target
securitized $459 million of solar loans from Loanpal of 80 percent renewable energy generation
in 2020.20 by 2030—a goal that will require significant capital
investment. Developing markets also are reckoning
Sustainable finance is entering a new era
with capital-intensive transitions. The World Bank
In the past decade, efforts at reducing emissions estimates that China needs a $14 trillion investment in
have centered on decarbonizing power generation, power and transport to meet its net-zero 2060 goals.22
and investment has focused on renewables. By the Increased funding for emerging technologies also is a
end of 2021, around 30 percent of global electricity harbinger of change. The historical growth of hydrogen
generation was from renewable energies.21 In this next and grid-scale storage, albeit from a low base, shows
era of transition, we will see continued focus on capital that project finance for emerging technologies is
deployment for sustained growth in low-emission growing quickly (Exhibit 19). The growth in energy
power generation. But we will also see many new storage is notable in that it has been sustained even
aspects of the global energy transition being pushed in the face of spiking raw-material prices.
as priorities—and requiring financing. These include
Finally, the new era is reflected in bank innovations
growth in electrification, the build-out of energy
aimed at financing the low-carbon transition (Exhibit
transmission and distribution infrastructure (including
20). Leading global banks and smaller local banks
grid-scale storage), emission reductions in high-
alike are developing new products, platforms, and
emission and energy-intensive sectors such as steel
in some cases, separate financing entities across
and cement, and natural climate solutions. All these
sectors.23 For example, Rabobank partnered with UN
efforts will require financing.
Environment and created AGRI3 Fund, which aims to
Worries about energy security and potential fuel mobilize $1 billion of investment by providing credit
shortages caused by Russia’s invasion of Ukraine enhancements and technical assistance to popularize
amount to a setback for the energy transition low-emission agriculture.24
in some countries, especially in Europe, but the
longer-term outlook remains unchanged. Indeed,
the war is likely to have accelerated adoption
of renewables by highlighting the risks of
overdependence on imported fossil fuels, especially
from Russia.
Signs of a next era include national net-zero plans

and bank engagement in innovative green financing
Signs of a next era for sustainable finance are already
visible, including continued investments in power
19 Wood Mackenzie, NREL, IRENA. Includes direct bank and TPO financing.
20 “Goldman Sachs pledges to buy $320M of loans from Loanpal,” S&P Global, June 10, 2020.
21 “Global Energy Perspective 2022,” McKinsey & Company, April 26, 2022.
22 China country climate and development report, World Bank, October 2022.
23 “Sustainable banks in the US: What they are and a list of eco-friendly options,” Mighty, 2022.
24 “AGRI3 Fund launched with Dutch government and Rabobank as anchor investors,” UNEP, January 27, 2020.

Web <year>
Exhibit
<Title> 19
Exhibit 5 of <x>
Despitebroader
Despite broaderslowdowns,
slowdowns, project
project finance
finance forfor emerging
emerging technologies
technologies
remained resilient.
remained resilient.
Annual funding volume,1 $ million
Hydrogen project finance2 Grid-scale energy storage3 project finance

>2x year over year
7,483
6,205
>10x year over year

2,309
1,267 1,343
350 333
0 0 19
2018 2019 2020 2021 Q3 YTD 2022 2018 2019 2020 2021 Q3 YTD 2022
1
Funding volumes include total value (debt and equity) of transactions closed in the given year.
2Growth in the first 3 quarters of 2022 driven by 2 large publicly supported projects in the US and the UK.
3Predominantly includes lithium-ion battery storage systems and projects with combined generation and storage.
Source: Infrastructure Journal
McKinsey & Company

Web <year>
<Title>
Exhibit 20
Exhibit 6 of <x>
Banks have already started to build innovative green businesses.

Banks have already started to build innovative green businesses.
Business type Examples
Products and Lending Retail banking: Electric-vehicle (EV) loans, green mortgages
services CIB1: Sustainability-linked loans, green loans, securitized loans (eg,
Tailored offerings residential solar), supply chain financing
for sectors,
technologies, or Capital markets CIB: Green-bond issuance, equity issuance for cleantech companies,
customer groups M&A advisory
Investments Retail banking and CIB: Green deposits

Wealth and asset management: Climate technology funds, climate
transition funds, decommissioning funds, blended finance funds
Other innovative Retail banking: Car subscription, reverse leasing of rooftop solar
services Wealth and asset management: Proxy voting choice, climate-based
security selection and portfolio modeling
Platforms 1-stop shop Retail banking: EV education, purchasing, and financing resources for retail
Dedicated advisory advisory platforms customers
or trading platforms CIB: Energy-efficiency education and financing resources for customers
for a wide range of that are small and medium-size enterprises
customers
Asset placement CIB: Originate-to-distribute platforms for green assets (eg, renewable-
platform infrastructure assets)
Carbon markets All: Carbon footprint tracking, carbon offset solutions
1
Corporate and investment banking.
McKinsey & Company

Growth has been fueled by policy shifts, new to generate almost half of the nation’s power needs
technologies, and growing corporate momentum from renewables by 2050.27
Policy changes, declining transition technology costs,
The European Union and United Kingdom have carbon
and broader demand for decarbonization will continue
emission trading schemes—known as cap-and-
to shift transition-investment risk profiles and project
trade policies—that effectively set a market price on
economics, creating investable value pools. Here we
emissions. The EU saw record carbon prices just shy of
give some examples of the trends making sustainable
$100 per metric ton in 2022. More than 80 percent of
finance more bankable.
projects in advanced stages of development globally
Policy shifts are in the United States, the United Kingdom, or
Government subsidies, tax credits, and guarantees, countries governed by the EU trading scheme.28
among other interventions, are unlocking bankable
Some countries, including the United States, are
value pools to enable the low-carbon transition. In
providing government support to derisk hydrogen and
the United States, for example, extensions of and
are looking to incentivize carbon capture and storage
changes to tax credit programs under the Inflation
(CCS). In the United States, for example, the 45Q tax
Reduction Act could almost double new solar and wind
credit subsidy for CCS was recently expanded from
capacity by 2030, compared with a scenario in which
$50 per metric ton to $85 per metric ton under the
previously established tax credit programs expire.25
Inflation Reduction Act. That makes CCS viable for
The modeled capacity increase would require an
a wide range of industrial applications domestically
additional $450 billion investment by 2030.26 The UAE
(Exhibit 21).
has announced plans to invest $163 billion in projects
Web <year>
Exhibit
<Title> 21
Exhibit 7 of <x>
TheInflation
The InflationReduction
ReductionAct
Act (US)
(US) dramatically
dramatically improves
improves the the project
projected economics
economics
for a wide range of CCS applications.
for a wide range of CCS applications.
Carbon capture costs,1 $/metric ton of CO₂
High-purity source Low-purity source Diffuse source

Post-IRA ($85/metric ton incentive) Pre-IRA ($50/metric ton incentive)
640
130–600
560
480
400
The IRA brings CCS into the money
320 for a variety of low industrial
power-generation applications3
240
$180/metric ton direct
air capture incentive
160
50–115 60–120
45–80 45–80 50–85 50–85 50–90
80 45–65
10–30 10–30 10–35 10–35
0
Gas Ethanol Hydrogen Ammonia Hydrogen Power Pulp and Iron Petro- Cement Power Power Direct air
processing high purity1 low purity2 generation: paper and steel chemicals generation: generation: capture
coal biomass natural gas
1
Figures exclude transport and storage costs. These costs can vary dramatically from project to project and will affect project economics.
2
Hydrogen emissions can range from isolated high-purity streams (low cost) to lower-purity combined streams (higher cost), depending on facility design.
3 Project economics must be valuated based on capital structure and project-specific capture, transport and storage costs.
Source: EU DPO Emission Baseline Database; EU ETS Data; Global CCS institute; Langholtz et al. (2020); NPC; Santos et al. (2021)
McKinsey & Company
25 McKinsey Power Model. Capacity additions and incremental capital spending may be overestimated.
26 Data from McKinsey Power Solutions and the National Renewable Energy Laboratory. Base case projections with expiration of ITC and PTC were
compared with IRA, including utility-scale solar and onshore wind, given no change for residential solar, commercial and industrial solar, and
offshore wind.
27 “United Arab Emirates to invest $163 bn in renewables,” BBC, January 10, 2017.
28 McKinsey CCS Tracker.

Technological innovation is enabling in Sweden. BNP Paribas, ING, KfW IPEX-Bank, and
lower costs and increased readiness UniCredit are leads in the deal.34 Even companies
As sustainable technologies scale, prices and in low-emission sectors are looking at opportunities
perceived risk decline, leading to expanded to achieve organic and inorganic growth by creating
commercialization and financing opportunities. In businesses that are relevant for a low-carbon future.
renewables, costs for solar-powered energy have
The financial services industry pivots toward
declined by 80 percent in the past decade (although
sustainability
macroeconomic factors and supply chain disruptions,
Multiple factors—including competitive pressures,
among other factors, still cause prices for end
client and investor demands, and regulatory
customers to fluctuate).29 Renewables now make up
requirements—are leading the financial services
the bulk of new generation capacity.30
industry to incorporate climate change and low-carbon
Financing opportunities created by these cost transition factors into decision making. Leading
declines include scaling strained mineral supply institutions in each region have set explicit targets
chains, equipment manufacturing, and retail financing for sustainable finance. However, differing definitions
for consumer purchases. As an example, the costs of what constitutes “sustainable” make it difficult
of lithium-ion batteries have dropped sharply—by to compare progress on these commitments. Many
97 percent since 199131—although their cost will recognize that they may face challenges in accounting
likewise continue to fluctuate with rising demand and for the impact of capital deployed or facilitated.
supply constraints in lithium-ion. Adoption of electric
The focus of net-zero financed emissions
vehicles (EVs) has accelerated globally because of
commitments also is evolving. Banks are maturing
declining production costs, customer preferences, and
from a simple understanding of the baseline to
extensive subsidies; rising sales will create financing
exploring with clients the levers to finance reduced
opportunities across the value chain, including for
emissions in the real economy. In sectors where low-
vehicle purchases, battery manufacturing, and the
emission alternatives are not readily available or not
construction of charging infrastructure. EV loan
at sufficient scale, banks are working through the
volumes for banks have already quadrupled since 2017
challenges of increasing exposure in order to support
and are expected to grow 24 percent annually to more
efforts to reduce emissions over time.
than $800 billion through 2030.32
As McKinsey noted in a recently published article,
The increase in demand for clean-energy technologies
banks’ goals for financed emissions are likely to
such as EVs also increases demand for raw materials
create a consequential shift, as these targets impose
such as critical minerals. Similar value-chain-wide
constraints on banks’ balance sheets, much as other
implications will arise across multiple climate solutions
internal or regulatory constraints apply to capital,
as technology risks and costs decline.
leverage, or liquidity. For example, to shift incentives
Companies move from commitments to and behaviors so they support transition finance,
action to accelerate decarbonization institutions are changing objectives for “reducing
By the end of 2021, more than 1,800 companies had financed emissions” into objectives for “financing
put in place science-based decarbonization targets.33 reduced emissions.” Meeting these objectives may
Some companies are already funding pilots and require more nuanced methodologies for measuring
projects initially through their own balance sheet, but financed emissions or setting targets.
many are looking to lenders and the capital markets to
fund bigger operational and strategic initiatives. For
example, the Swedish steel company H2 Green Steel
recently announced support from European financial
institutions for €3.5 billion of debt and equity financing
for a sustained hydrogen-powered “green” steel plant
29 “Documenting a decade of cost declines for PV systems,” National Renewable Energy Laboratory, February 10, 2021.
30 Electricity market report, International Energy Agency, January 2022.
31 David L. Chandler, “Study reveals plunge in lithium-ion battery costs,” MIT News, March 23, 2021.
32 McKinsey Center for Future Mobility.
33 Science Based Targets Initiative (SBTi), data as of September 2022.
34 “Sweden’s H2 Green Steel gains support for $3.45 bln debt funding for fossil fuel-free plant,” Reuters, October 24, 2022.

Regulatory focus on climate and sustainability A large, untapped value pool for banks
Regulatory requirements for climate risk management Financing the energy transition will require a massive
and financial disclosure will further infuse rigor and reallocation of capital. Banks are on the front line to
transparency into the banking industry’s approach provide financing and advisory support for a wide
to sustainability. Prudential regulators globally have range of opportunities.
defined requirements for climate risk management,
Funding needs for a net-zero transition could
including expectations for banks to integrate climate
exceed $4.4 trillion annually through 2030
impact into strategic planning and business
Various estimates of the required investment
decision making.
needed for the net-zero transition exist; according
Disclosure-focused regulations and standards will also to an analysis by the McKinsey Global Institute and
create increased rigor and transparency for climate McKinsey’s Sustainability Practice, the transition will
finance. Even more importantly, they will create more require at least $4.4 trillion annually through 2030 (see
potential for banks to identify financing opportunities. sidebar “Sizing the investment needed for the net-zero
For example, in March 2022, the International transition”).37 Clean-power investment, for example,
Sustainability Standards Board (ISSB) circulated will need to be at three times 2020 levels by 2030,
draft global climate-related and sustainability-related while investment in the electrification of road mobility
disclosure standards incorporating both climate risk will need to increase to ten times 2020 levels by 2030.
and opportunity reporting.35 The standards apply
to climate-related disclosures for banks but also
create transparency into borrowers’ climate-related
exposures and transition plans, helping banks identify
opportunities for financing their clients. The European
Union and United Kingdom also have introduced new
reporting requirements.36
Sizing the investment needed for the net-zero transition
McKinsey Global Institute has developed include those in the power, building, and capital-spending needs through 2050.
an economy-wide model based on the Net transport sectors (see exhibit, next page). Other sectors, such as sustainable fuels,
Zero 2050 pathway from the Network for the have fast-growing investment potential.
Heavy investments in sectors that provide
Greening of the Financial System (NGFS).38
critical inputs or safeguards for the economy, These estimates of the cost of the
This model suggests that transition to a
such as clean power and nature restoration, transition do not take into account
net-zero economy by 2050 will require
will be needed before 2035 to establish a heightened physical risks and
significant front-loaded spending across
foundation for the transition to net zero. commensurate adaptation costs, which
the economy in sectors that account for
Specifically, the NGFS Net Zero 2050 could lead to higher spending estimates.
approximately 85 percent of global emis-
scenario assumes large, up-front
sions. Financing low-emission assets over
investments in afforestation to capture
the next decade will require some
maximum CO2 sequestration benefits. For
$4.4 trillion annually, comprising $2 trillion
the rest of the economy, some sectors, such
continued investment and $2.4 trillion new
as mobility, have large, sustained
investment. The biggest spending needs
35 “Climate-related disclosures,” IFRS Foundation, n.d.

36 See “Corporate sustainability reporting,” European Commission, n.d.; and “Climate-related reporting requirements,” UK Financial Conduct
Authority, updated June 10, 2022.
37 The net-zero transition, January 2022. The report estimates an average of $9.2 trillion annual capital spending on a combination of low-emission
and high-emission physical assets between 2021 and 2050. In this chapter, we focus on the investment need in low-emission assets only, which is
where the model suggests most opportunities will be found before 2030.
38 NGFS climate scenarios for central banks and supervisors, Network for Greening the Financial System, June 2021.

Web <year>
<Title>
Exhibit
Exhibit 8 of <x>
Transition to a decarbonized economy will require significant capital

Transition to a decarbonized economy will require significant capital expenditures
expenditures across sectors.
across sectors.
CAGR >5% Maximum capital expenditure by 2030
Capital Relevant
expenditure Minimum, Maximum, CAGR,2 volume for
Sector Project type need trajectory1 $ billion $ billion % banks,3 % Financing implications
Clean power New facilities for Decarbonizing the power

renewable 1,080 2,520 2 ~45 sector requires significant
generation, up-front capital expenditures
transmission & in the next decade and
distribution, and sustained investment through
storage 2050
Sustainable New facilities and Capital expenditure need will
40 370 7 ~45
fuels production plants grow significantly over the
for hydrogen or next 3 decades, creating
biofuels incentives to invest in
business building now to
prepare for future growth
opportunities
Building de- Insulation, Decarbonizing the building

870 1,850 2 ~60
carbonization heating, and sector will consistently
cooking4 require substantial capital
expenditures through 2050
to achieve net zero, creating a
stable opportunity for banks
Electrification New battery Low-emissions road mobility

of road electric vehicles, 230 3,490 9 ~55 requires large capital
mobility fuel-cell electric expenditures and may grow
vehicles, and significantly through 2050,
supporting making it a hard-to-ignore
infrastructure opportunity for banks
Agriculture Crop and livestock A stable increase in

410 620 1 ~65
production and investment need for
emissions sustainable agriculture will
measures create an attractive
opportunity for some
investors
Nature Land purchases Heavy investment in nature

10 150 N/A5 ~25
restoration for afforestation restoration is required
and avoidance of between now and 2030 to
deforestation have sufficient forest stock
for net-zero by 20506
Green New low- Capital expenditure need will

20 130 6 ~35
industry and emissions cement grow significantly over the
manufacturing or steel facilities next 3 decades, creating
and equipment incentive to invest in business
building now to prepare for
future growth opportunities
Average annual capital expenditure requirement under the NGFS Net Zero by 2050 scenario from 2021 to 2050. 2Calculated using annual capital expenditure
1
required for 2021 and annual capital expenditure required for 2050. 3 Percentage of capital expenditure investments accessible for commercial financial
institutions and corporations, 2021–30. 4Accounts for increase in number of buildings; upgrade pricing did not distinguish between new builds and existing
buildings. 5Maximum capital expenditure needed for investment now. 6Insufficient investment in the next decade will lead to higher capital expenditure needs
than illustrated for 2030–50.
Source: “The net-zero transition: What it would cost, what it could bring,” McKinsey Global Institute, 2022
McKinsey & Company

Diversity of opportunities and distribution infrastructure; it also has broad
Based on the McKinsey model’s $4.4 trillion capital applications in services, including ammonia production
spending estimate, we estimate that commercial and steel. 39
financial institutions have an annual direct financing
Decarbonizing emission-intensive assets will be
opportunity of about $820 billion. Beyond that, banks
capital intensive and will require banks to work closely
could facilitate an additional $1.5 trillion of investments
with customers on capital deployment.40 These
for corporates between 2021 and 2030 (Exhibit 22).
efforts are often technically challenging and come
Banks can continue to increase investment in with the credit and reputational risk of financing
comparatively mature technology such as renewables carbon-intensive assets, institutions, and sectors.
or EVs by partnering with large corporate clients or However, if banks are to finance the lowering of
cultivating relationships with new and less-established emissions, engagement with carbon-intensive sectors
companies operating in the sustainability space. For is critical. This could include guiding and helping utility
example, banks are expanding into utility-scale solar clients through coal plant decommissioning, financing
while addressing margin contraction by bundling solar the application of CCS to cement production, or
and battery storage in a single deal. offering tailored solutions for building retrofits. Banks
can leverage existing instruments, offer new products,
Further, banks can address a more holistic set of
or spin off new entities to address this challenge.
capital needs across value chains. For example,
hydrogen requires renewables, electrolyzers, storage,
Web <year>
<Title>
Exhibit 22<x>
Exhibit 9 of
Banks have a variety of possible ways to finance the low-carbon transition.

Banks have a variety of possible ways to finance the low-carbon transition.
Annual investment requirement,1 2021–30, $ billion
Infrastructure funds Commercial financial institutions Households/individuals Corporations

Public primary financing actors Private-equity/venture capital funds Institutional investors
Potential for banks to engage
4,450 280
1,180
2,990 380
770
1,840 1,040
800
Total annual Grant Consumer Commercial Project Project Balance Balance Balance
investments finance finance finance equity debt sheet sheet debt sheet
finance equity
1
Numbers in the chart may not sum to totals, due to rounding.
Source: “The net-zero transition: What it would cost, what it could bring,” McKinsey Global Institute, 2022; McKinsey Transition Finance Model
McKinsey & Company
39 Global hydrogen review 2021, International Energy Agency, October 2021.

40 Net zero by 2050: A roadmap for the global energy sector, International Energy Agency, October 2021.

Finally, since carbon offsets will be an important Opportunities also beckon in retail banking. Banks
lever for companies to use in meeting their emission can provide green services across multiple business
reduction targets in the near term, especially in hard- lines, such as advisory platforms (for example,
to-abate sectors, banks can play a role in financing a one-stop shop for home retrofits); green consumer
offset projects. Some global banks have acted as lending, including for EVs; green asset vehicles;
the lead arrangers of investments in scaled carbon and climate-focused funds.
projects or have directly financed them. For example,
Within asset management, banks already manage
JPMorgan served as the placement agent for the
a significant capital pool that can facilitate the climate
latest $650 million equity round of Climeworks,
transition. Globally, the top 30 bank-captive asset
a leading direct air capture start-up.41
managers in 2021 held more than $26 trillion in assets
A role beyond debt-focused climate finance under management—more than 20 percent of the
Clients will need support to navigate the complexities global asset management market. And institutional
of the end-to-end transition journey in the most investors, which together contribute about 60 percent
capital-optimal way. Within corporate and investment of the global asset management market, increasingly
banking (CIB), M&A opportunities emerge as large use environmentally focused topics to search for their
corporates in carbon-intensive sectors restructure, investments.42 In doing so, many are narrowing their
transition, or acquire new low-carbon businesses. As focus from the broader ESG category as a catchall
new climate-tech markets mature, banks will also play investment thesis to a more specific and substantiated
a role in facilitating the consolidation of fragmented strategy focus on climate financing, which is being
markets. driven by both demand and regulatory pressure.
Banks can serve as advisors and intermediaries for Significant demand for debt
a wide range of companies, from large corporates Based on the roughly $4.4 trillion of capital required
to rising start-ups, on services such as transition to meet net-zero targets and the share of that capital
advisory, asset placement, and carbon market likely to come from bank lending, we estimate that the
facilitation. revenue potential for banks from debt investment will
average roughly $100 billion annually through 2030.43
In the carbon market space, many banks have already
This represents approximately 5 percent of total
started building businesses across the value chain,
global banking revenue pools (Exhibit 23).44 It does
from supply to intermediation and demand. Some
not include the sizable revenue potential that exists
global banks have set up carbon credit trading desks
beyond debt-focused investments.
and developed financial products around carbon
credits, including indexes, funds, and certificates.
Banks have also been acting as demand aggregators
by developing digital tools to help corporate clients
purchase and use offset solutions.
Revenue potential for banks

from debt investment could average
$100 billion annually through 2030.
41 “Climeworks raises CHF 600 million in latest equity round,” Climeworks, April 5, 2022.
42 eVestment; McKinsey Global Growth Cube.
43 Interest-related revenues from the main bank product categories, including balance sheet debt (consumer finance and corporate loans) and project
finance were modeled with different maturities by product categories and margins by regions. The analysis does not include underwriting fees
for capital-market-related transactions and fees for M&A or related revenues from sales and trading, transaction banking, and ESG investment
products.
44 McKinsey Global Banking Pools; McKinsey Transaction Finance Model (TFM).

Web <2022>
Exhibit 23
<GBAR2022>
Exhibit <7> of <7>
Based on
Based oninvestment
investmentrequirements
requirementsininlow-emission
low-emission assets,
assets, thethe total
total global
global banking
banking revenue potential is about $100 billion per year through
revenue potential is about $100 billion per year thorough 2030. 2030.
Average annual revenue pools for banks from Retail- and wholesale-lending banking
debt-related investments in low-emission revenues for financial year 2021, %
assets,¹ 2022–30, $ billion
Asia–Pacific Latin
America 4 3
7
>10
MENA²
>30 >5
North
Eastern Europe 20 6
>10 America
Western Europe
>25 >20
¹Regional revenue potential is calculated based on the bank-accessible portion of investment needs in low-emission assets for each region by 2030. Investment
needs are modeled using the Network for Greening the Financial System (NGFS) Net Zero 2050 scenario. Interest-related revenues from the main bank
product categories (consumer finance, balance sheet debt, and project finance) are modeled with different maturities by product categories and margins by
regions. Underwriting fees for capital-market-related transactions and fees for M&A, as well as related revenues from sales and trading, transaction banking,
and environmental, social, and governance investment products, are not included in the analysis.
²Middle East and North Africa.
Source: McKinsey Global Banking Pools; McKinsey Transition Finance Model; “The net-zero transition: What it would cost, what it could bring,” joint report from
McKinsey, McKinsey Global Institute, and McKinsey Sustainability, Jan 2022
McKinsey & Company
Navigating the next era that financing the climate transition is a top-five CEO
Banks will face some key challenges and need to take priority for their bank, and they predict a significant
measured actions to seize the significant opportunities increase in attractiveness and reduction in risk in
in the new era of sustainable finance. transition technology financing over the next eight
years. However, bank leaders report a significant
Critical challenges to scaling the business
lack of needed capabilities outside of solar and wind.
While banks are increasingly active in sustainable
Respondents predict that climate solutions—including
finance, success in scaling the business will depend
grid-scale storage and infrastructure, green hydrogen,
on how well they address some critical challenges.
green fuels, biomass, and CCS—will see rising demand
In a McKinsey survey of bank executives with active
for financing. At the same time, a much smaller
roles in sustainable finance in their organization,45
percentage of bankers say their banks have near-term
responses highlight the importance bank leaders
capabilities to finance each of these areas (Exhibit 24).
are giving to sustainable finance and reveal gaps
in banks’ capabilities to capture the emerging
opportunities. Some 70 percent of bankers indicate
45 Survey conducted in Q3 2022 including 50 bank executives with active roles in sustainable finance, including head of business, head of
sustainability, and credit or climate risk executives.

Web <year>
<Title>
Exhibit 24
Exhibit 11 of <x>
Banks are underinvesting in the capabilities needed to meet expected

Banks are underinvesting in the capabilities needed to meet expected transition
transition financing demand.
financing demand.
Financing capability and expected demand gap,1 % of total respondents
Expected financing demand, 2030 Current capabilities, 0–3 years xx% Gap
90
80 4%
26% 2%
70
40%
60
44% 32% 38%
50
38% 28% –4%
40
30
20 2%
10
0
Battery Solar Grid-scale Grid Wind Green Green Biomass Carbon Natural Coal
electric energy infrastructure hydrogen fuels capture and gas
vehicles storage storage
Respondents ranked capabilities and expected demand 1–5 (1 = very low, 2 = low, 3 = neutral, 4 = high, 5 = very high). The graph displays % of respondents
1
who ranked each as 4 or 5.

Source: McKinsey survey of global bankers (n = 50)
McKinsey & Company
Lack of expertise is not the only challenge. Several caused by price uncertainty or regulatory reliance;
others are significant: longer-tenor, unconventional legal structures; and
lending to newer or smaller companies. Although
Project economics. Some nascent or rapidly evolving
bankers are developing solutions to mitigate some
technologies have high up-front capital requirements
of these risk factors, some deals may not get past
combined with uncertain cash flows. Long payback
credit committees.
periods for certain technologies may increase risk
and diminish returns, while the front-loaded capital Building the precision of credit risk management
required for the transition across sectors may approaches could enable the scaling of sustainable
discourage lenders from committing capital. finance. That would mean, at the transaction level,
building expertise and precise risk measurement to
Market conditions. Margins have been contracting
understand the economics and sources of uncertainty
for some bankable technologies, including utility-scale
at the deal level. At the portfolio level, managing
solar. Merchant tail exposure has grown in mature
exposure limits by underlying technologies, sponsors,
markets, limiting the predictability of project cash flow.
and geographies can enable banks to grow in
Some natural climate solutions, like conservation and
sustainable finance while maintaining a diversified
ecosystem restorations, have relied on carbon markets
credit portfolio and avoiding concentration risk.
for monetization, but these markets are still nascent,
and pricing uncertain. Scalability. Many green projects depend on permits,
supporting infrastructure, and supply chains, all of
Credit risk. Many deals, especially in newer
which can delay scaling. Some do not have enough
technologies, currently fall outside banks’ risk
certain demand or are not bankable without policy
appetite, for reasons that include lack of historical
stimulus.
performance data; uncertainty in future cash flows,

Standardization and disclosure. For now, there are Many opportunities will require new credit
no established standards for sustainability-related capabilities and, possibly, a “credit sandbox.”
financial products or performance metrics. This is
— Expand capabilities for advisory to support clients
an impediment to efficiency in product scaling and
as they try to navigate the complexities of the
heightens the risk of greenwashing—although, as
transition in the most capital-optimal way, whether
noted earlier, the regulatory environment is evolving.
it be through M&A, spin-offs, hedging, using
Indeed, heightened disclosure requirements and
carbon offsets, or implementing other strategies.
scrutiny may require additional data, tracking, and
reporting for sustainability-related capital deployment, — Work with climate-tech companies in early growth
resulting in higher transaction costs. stages. With the speed at which technologies and
markets are moving, companies may move from
Banks can establish and evolve controls on climate
venture capital and private-equity rounds to IPO
statements and disclosures to meet these rising
faster than expected. CIB institutions that build
regulatory requirements and investor demands. It
expertise in specific emerging technology areas
will be important to demonstrate the decarbonization
will be best prepared to capture a growing share
impact of sustainable financing activities, especially
of the market while also supporting clients in the
where commitments are made.
full financing life cycle. Some banks have started
Reputational risk. A factor that could affect to invest as principals in venture capital funds or
sustainable finance in the future is reputational risk. launched their own funds to gain exposure and
In particular, brown-to-green financing may create access to early-stage climate-tech companies.
reputational concerns, given the profiles of clients,
— Capitalize on the rapid growth of carbon
including fossil fuel companies.
markets. These markets present opportunities
Forging a path forward across the value chain, from supplier financing,
Sustainable finance will require a strategic approach carbon trading, and intermediation to advisory
as banks decide not only what they will finance but also and buyer financing. Depending on strategic
how they finance. They will need a nimble approach to capabilities, banks can build businesses to address
assessing a rapidly changing market and should adjust opportunities in any or all parts of the value chain.
their stance as they prioritize the value pools they want
Commercial and small-business banking. Midsize
to access, based on factors such as existing client
and small businesses are in much earlier stages
base, institutional strengths, and geographic footprint.
of sustainability. Growth for banks serving these
In this final section, we offer a starter list of ideas
markets will be rooted in scalable financing solutions
to consider.
for commercially viable products and services, as
Corporate and investment banking. Among banking well as in providing expertise and capabilities. Where
businesses, CIB institutions have made the most clients are retrofitting buildings and shifting their
progress. However, many opportunities remain energy mix, banks can provide equipment finance for
for them to capture: energy-efficiency measures (such as HVAC, building
management systems, electric machinery, and solar
— Build on the progress made in renewable energy
panels) or financing for retrofits. They can also finance
over the past decade. This includes scaling the
vehicle fleets as companies transition to electric and
financing capabilities to close the gap for solar,
fuel-cell vehicles.
wind, and hydro while simultaneously developing
capabilities for new clean energy such as green For small businesses, banks can advise clients about
hydrogen and enabling infrastructure such the economic case for decarbonizing—for example,
as storage. information on tax credits and grants or the financial
case for specific measures aimed at increasing
— Capture transition financing opportunities with the
energy efficiency. Banks also can give access to tools
existing client base. Changing market conditions
and analytics for tracking carbon emissions. These
may unlock some commercial opportunities
capabilities can be developed either in-house or
through direct incentives; other opportunities may
through partnerships with vendors or nonprofits.
require creative partnerships and the development
of solutions with clients directly.

Retail banking. Retail banks can create portfolios of retail investors. Institutions and retail investors alike
solutions to help households decarbonize. The largest are increasingly shifting their focus from general ESG
decarbonization opportunities on the consumer themes to the low-carbon transition: over the past
side will be in making homes more energy efficient. five years, total global assets under management in
In addition to mortgage options for energy-efficient climate funds grew more than eight times, reaching
homes, banks can provide financing solutions for $408 billion in 2021.46
retrofitting, home appliances, and rooftop solar panels.
As we enter the next era of sustainable finance,
In addition, banks can capture the sizable opportunity
banks are already finding different ways to participate
in auto finance, where the transition to EVs will require
and capture the opportunities. The revenue and
financing of vehicles and EV chargers—either home
growth prospects are evident and likely to grow.
EV charging or subscriptions to EV charging networks.
These institutions are critical to facilitating access
Retail banks can also support customers through to the capital needed to support the transition to a
innovative platforms or a one-stop shop that provides sustainable future. While we’re still in the early stages
a single point for all sustainability-related financing. of this transformation, accomplishing it already
Finally, retail banks can explore partnership options— requires forward-looking leadership in the banking
for example, with solar developers and EV networks— sector.
to enable the scaling of these solutions.
Wealth and asset management. Wealth and asset

management firms can develop thematic investment
options with targeted climate-forward investment
theses to meet the demand from institutional and
46 Investing in times of climate change 2022: Assets in climate funds double as product development accelerates, Morningstar, 2022. Climate funds
are mutual funds and exchange-traded funds with a climate-related mandate, including low-carbon, climate-conscious, green bond, climate
solutions, and clean-energy/tech funds.

Contacts
Authors
Miklos Dietz Archana Seshadrinathan
Senior Partner, Vancouver Associate Partner, Singapore
[email protected] [email protected]
Attila Kincses Dee Yang

Associate Partner, Budapest Partner, New York
Regional leadership contacts
Asia Middle East & Africa
Renny Thomas Gokhan Sari

Senior Partner, Mumbai Senior Partner, Istanbul
Europe North America
Stephanie Hauser Ishaan Seth

Senior Partner, London Senior Partner, New York
Latin America
Lino Abram
Senior Partner, San Jose
[email protected]

Acknowledgments
The authors would like to thank the following colleagues for their contributions to this report: Faraz Ahmad,
Zsofia Balogh, Debopriyo Bhattacharyya, Sarika Chandhok, Kevin Xi Chen, Deirdre Collins, Joseba Eceiza,
Nuno Ferreira, Ruying Gao, Somesh Khanna, Suruchi Khurana, Mekala Krishnan, Cindy Levy, Daniel Mikkelsen,
Milana Mukiyeva, Marie-Claude Nadeau, Hamid Samandari, Aaron Schifrin, Simone Schoeberl,
Joydeep Sengupta, Vishnu Sharma, Marcus Sieberer, Daniel Stephens, Adam Toth, Weige Wu.
Editor: Peter Gumbel
Developed and produced by the McKinsey Global Banking Practice Publishing team:
Matt Cooke Monica Runggatscher

Director of Communications Communications Specialist (including media relations)
Paul Feldman Chris Depin

Executive Editor Communications Coordinator
Kate McCarthy
Head of Reach & Engagement Operations
[email protected]
This annual review of the global banking industry is based on data and insights from McKinsey Panorama,
McKinsey’s proprietary banking research arm, as well as the experience of clients and practitioners from all over
the world. We welcome comments about this research at [email protected].

December 2022
Copyright © 2022 McKinsey & Company. All rights reserved.

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Banking on a

Global Banking Annual Review 2022 2

Global Banking Annual Review 2022 3

Global Banking Annual Review 2022 4

On a country-by-country level, the worst banking

Global Banking Annual Review 2022 6

The Flat Decade (2012–21) The New Era (2022)

Global environment Stagnation of globalization, general stability, Reemergence of geopolitics as a disruptive

McKinsey & Company

Global Banking Annual Review 2022 7

Return on equity,1 % Not adjusted¹ Adjusted² Forecast range Cost-of-equity band

McKinsey & Company

Global Banking Annual Review 2022 8

6,507 Capital markets and Composition of the growth

8 398 Wealth management

905 7 966 Everyday banking

635 6 673 Mortgages

2019 2021 2022²

McKinsey & Company

Global Banking Annual Review 2022 9

These shocks are not necessarily good or bad for

Global Banking Annual Review 2022 10

Positive Mixed Negative

1 Figures may not sum to 100%, due to rounding.

McKinsey & Company

McKinsey & Company

Global Banking Annual Review 2022 11

Global Banking Annual Review 2022 12

Source: S&P Global; McKinsey Panorama

McKinsey & Company

Global Banking Annual Review 2022 13

Difference in price to book between Top 3 banks

McKinsey & Company

Global Banking Annual Review 2022 14

Global banking ROE, %

1 Consumer price index.

McKinsey & Company

Global Banking Annual Review 2022 15

We expect Emerging Asia, China, Latin

CAGR <0% 0–3% 3–6% >6%

Japan 1 3 −10 –2 –10 –2 –20

China 67 62 14 29 99 167 438

World 160 185 –19 74 116 316 832

Banking revenue forecast growth (2021–25), 1 $ billion

CAGR <0% 0–3% 3–6% >6%

China 76 43 91 36 207 100 554

World 218 90 282 99 388 183 1,261

McKinsey & Company

Global Banking Annual Review 2022 17

All other industries

Source: S&P Global; McKinsey Panorama

McKinsey & Company

Global Banking Annual Review 2022 18

Note: Analysis based on a sample of more than 1,000 institutions.

McKinsey & Company

Global Banking Annual Review 2022 19

Traditional banks represent only 39 percent of North Star institutions

Traditional banks 51 4 22 1 18 3 39%

Source: S&P Global; McKinsey Panorama

McKinsey & Company

Global Banking Annual Review 2022 20

Geography is back as a major driver of valuation.

Other factors North America 1.3 13