FX168 Financial News (North America) News On Friday (October 18), McKinsey & Company consultants warned in their annual industry status report that the high profits enjoyed by global banks in the past two years may be "fleeting," and predicted that declining interest rates and soft loan demand will pose challenges to the industry.

The report points out that the tangibleCompared to history, this premium is currently at the 97th percentile."rose to 11.7% from around 1,700 listed deposit institutions last year, marking the best performance since the global financial crisis. However, to maintain recent profitability, many banks need to cut costs to five times the normal annual rate, which is a daunting task for an industry that has always struggled to improve productivity.

McKinsey stated: "Improvements in ROI may be temporary." The company's analysis shows that without the support of higher interest rates, ROIs in multiple regions may only be 8%, or even lower than the cost of capital, a support that is now fading.

The consultancy firm's research further confirms analysts' concerns about declining profitability. Global monetary authorities are shifting their focus from containing inflation to stimulating economic growth. The Fed cut its benchmark interest rate by half a percentage point for the first time in September, and the ECB and the Bank of England have also started to reduce rates, with further easing expected in the coming months.

McKinsey predicts that lower rates could reduce the net interest margin (a key profitability indicator, the gap between bank financing costs and loans) by about 16% by 2030 compared to 2023. In response to this trend, many large banks have already started layoffs.

However, these cost-cutting measures may not be enough to offset the profit gap across the entire industry. The report points out that to maintain the current ROTE under certain macro-driven scenarios, the industry needs to reduce the cost of each asset by 5% annually, the equivalent of five times the historical performance of the industry.

Vik Sohoni, partner at McKinsey in Chicago, said: "Banks must exert more effort in their future development."

The consulting firm is known as a "star-making factory," having cultivated several prominent bank CEOs, including Jane Fraser of Citigroup, Charlie Nunn of Lloyds Banking Group, and former CEO James Gorman of Morgan Stanley. McKinsey believes that banks can selectively enter markets and engage in wealth management, following the successful experiences of current leaders, to "defy gravity."

The report also indicates that last year, banks' price-to-book ratio discount compared to other listed companies widened to 68%, with their stock price only at 90% of asset value. McKinsey points out: "Although the banking industry is the largest profit-making sector globally, the market remains skeptical about its long-term value creation, ranking last in the PB ratio among all industries."

Pradip Patiath, partner at McKinsey in Miami, stated that the banking industry's performance to date contradicts the logic of "financial industry growth driven by growth in other industries," partly due to the financial sector's labor productivity not reaching levels comparable to other industries. "There is no evidence of economies of scale," Patiath added, "being the largest does not necessarily mean better."

Banks, especially European banks, also attribute the discount to post-crisis regulations. The situation is changing, with policymakers in the USA and the United Kingdom gradually softening the latest reform proposals, while the three largest economies of the European Union call for a broader relaxation of rules.