McKinsey & Company published its 2023 Global Banking Annual Review. The analysis unpacks the shifts in balance sheet, transactions, and distribution that have been leaving banks, to go to nontraditional institutions and other parts of the market, a movement McKinsey calls the ‘Great Banking Transition’.
Globally, financial institutions are generating the highest profits in more than a decade, resulting in about $400 trillion in assets and generating $6.8 trillion in revenue in 2022. This upturn arises from the improvement in net interest margins that boosted the sector’s profits by about $280 billion in 2022 and lifted return on equity (ROE) to 12 percent in 2022 and an expected 13 percent in 2023, compared with an average of just 9 percent since 2010.
Africa’s banking sector echoed this performance, generating $22.3 billion in net profits in 2022, with an average growth of about 8 percent annually since 2021. Africa also outperformed the global trend with ROE of 15 percent recorded in 2022 and 16 percent in 2023, with some African banks amongst the most profitable. Higher interest rates across most of the continent ended years-long trend of margin compression.
The banking sector in Nigeria generated more than $2 billion in profits in 2022. ROE is expected to improve to 21 percent this year and may have an ROE slightly higher than cost of equity.
“The oscillating interest rate environment will affect Nigeria’s transition, but exactly how remains to be seen,” says Mayowa Kuyoro, a Partner and Head of McKinsey’s Fintech and Payments practice for East Europe, Middle East, and Africa.
“We may be going through a phase in which a long-term macroeconomic turning point—including a higher-for-longer interest rate scenario and an end to the asset price super cycle—changes the attractiveness of some models that were specifically geared to the old environment, while other structural trends, especially in technology will likely continue.”
Besides overcoming challenges, Nigerian banks have a major opportunity to create value. The analysis lays out possible and not mutually exclusive priorities that could help institutions survive and thrive:
- Leverage technology and GenAI capabilities to boost productivity, utilize talent better, and improve the delivery of products and services. This includes capturing the AI opportunity, along with advanced analytics, to deploy process automation, platforms, and ecosystems; operating more like a tech company to scale the delivery of products and services; cultivating a cloud-based, platform-oriented architecture; and improving capabilities to address technology risks. Distinctive technology development and deployment will increasingly become a critical differentiator for banks.
- Scaling or transforming transaction businesses. Scale in a market or product is a key to success, but it can be multifaceted: institutions can find a niche in which to go deep, or they can look to cover an entire market. Banks can aggressively pursue economies of scale in their transactions business, including through mergers and acquisitions (which has been a major differentiator between traditional banks and specialists) or by leveraging partners to help with exits.
- Leveling up distribution in Go to Market. Sell to customers and advise them directly and indirectly, including through embedded finance and marketplaces and by offering digital and AI-based advisory. An integrated omnichannel approach here could make the most of automation and human interaction, for example. Deciding on a strategy for third-party distribution, which could be via partnerships to create embedded finance opportunities or platform-based models, can create opportunities to serve customer needs, including with products outside the institution’s immediate business models.
- Adapting to the next generation E2E risk enablers. Financial institutions everywhere will need to stay on top of the ever-evolving risk environment. In the macroeconomic context, this includes inflation, an unclear growth outlook, and potential credit challenges in specific sectors such as commercial real estate exposure. Other risks are associated with changing regulatory requirements, cyber and fraud, and the integration of advanced analytics and AI into the banking system. To manage these risks, banks could consider elevating the risk function to make it a potential differentiator. For example, in client discussions, product design, and communications they could highlight the bank’s resilience based on its track record of managing systemic risk and liquidity. They could also further strengthen the first line and embed risk in day-to-day activities, including investing in new risk activities driven by the growth of gen AI. Underlying changes in the real economy will continue in unexpected ways, requiring banks to be ever more vigilant.
“Nigerian institutions will need to examine each of their businesses to assess where their competitive advantages lie across and within the three core banking activities—balance sheet, transactions, and distribution—and to what extent they can offer the products in high demand at a time when risk capacity is broadening and many clients and customers are searching for the highest deposit yields,” says Kuyoro.
