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Global Banking Annual Review 2022 Banking On A Sustainable Path
Global Banking Annual Review 2022 Banking On A Sustainable Path
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
The yeareverything
The year everythingchanged—except
changed— except banking
banking valuations.
valuations.
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
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
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.
After aadecade
decadeofofflat
flatreturns,
returns, 2022
2022 represented
represents a era
a new newinera in banking.
banking.
Banking profitability through the eras
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
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.
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
Growth of
1,470 Large corporations revenue pool
1,387 6
1,363 1 345
1
Includes microloans and professional loans.
²Estimated.
Source: Global Banking Pools, McKinsey Panorama
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.
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.
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
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
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
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
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
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
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.
Source: S&P Global; McKinsey Panorama
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
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.
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
Africa 4 1 3 0 5 6 18
Middle East 1 2 0 0 1 5 9
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
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
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
48
Reduced profitability
2 ~70% gap
52
Impaired-growth outlook
1
Banks
0
2005 2010 2015 2020
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
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.
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
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.
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
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
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.
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
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
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.
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.
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
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
20 20
15 15 13
12 12
11
10 10
6 5
4 3
5 3 5
2
1
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.
Source: Dealogic as of Oct 12, 2022
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
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
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.
Source: Dealogic as of Oct 12, 2022
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.
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
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
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.
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.
Despitebroader
Despite broaderslowdowns,
slowdowns, project
project finance
finance forfor emerging
emerging technologies
technologies
remained resilient.
remained resilient.
Annual funding volume,1 $ million
6,205
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
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
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)
1
Corporate and investment banking.
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
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)
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.
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.
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
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
Web <year>
<Title>
Exhibit 22<x>
Exhibit 9 of
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
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.
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).
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
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.
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
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,
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.
Latin America
Lino Abram
Senior Partner, San Jose
[email protected]
Developed and produced by the McKinsey Global Banking Practice Publishing team:
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].