Asia-Pacific banks must make radical changes to survive the coming slump, as late-stage economic cycle looms

Banks, particularly those in the Asia-Pacific region, must think hard about “radical” moves to reshape their businesses as the global economic cycle reaches a late stage and central banks become more dovish, according to a new report by the consulting firm McKinsey & Company.

Globally, only about 40 per cent of lenders are generating returns below their cost of equity, while the remaining 60 per cent are destroying value, McKinsey said. A prolonged economic downturn, with banks navigating low to negative interest rates, “could wreak further havoc,” the firm said.

“In the last cycle the banks made a lot of effort to shore up their capital base to improve their productivity,” said McKinsey’s senior partner in Singapore Joydeep Sengupta, a co-author of the report. “We are in the late cycle. It implies that if you have much lower growth moving forward, the time that you need to reinvent is rapidly running out.”

The International Monetary Fund (IMF) cut its outlook last week for 2019 global economic growth to 3 per cent, the slowest pace since the global financial crisis a decade ago. The IMF said growth has weakened because of “rising trade barriers and increasing geopolitical tensions”, including a trade war between the world’s two biggest economies that has raged for more than a year.

“Heightened trade and geopolitical tensions including Brexit-related risks, could further disrupt economic activity, and derail an already fragile recovery in emerging market economies and the euro area,” the IMF said. “This could lead to an abrupt shift in risk sentiment, financial disruptions, and a reversal in capital flows to emerging market economies. In advanced economies, low inflation could become entrenched and constrain monetary policy space further into the future, limiting its effectiveness.”