The global banking landscape is witnessing a surge in profits, largely attributed to rising interest rates. Nigerian financial institutions, like their global counterparts, are also enjoying the upturn. However, this financial success comes amidst a backdrop of significant structural and macroeconomic shifts that are prompting banks to adapt and evolve.
A recent report by McKinsey & Company, the 2023 Global Banking Annual Review, sheds light on these shifts, which they refer to as the ‘Great Banking Transition.’ The analysis delves into the changes in balance sheets, transactions, and distribution channels that are reshaping the banking industry worldwide.
Globally, financial institutions have reported the highest profits in over a decade, boasting approximately $400 trillion in assets and generating a staggering $6.8 trillion in revenue in 2022. This upswing can be attributed to improved net interest margins, which boosted profits by approximately $280 billion in 2022, and raised return on equity (ROE) to 12 per cent in 2022, with an expected 13 per cent in 2023. This represents a significant increase from the average nine per cent ROE since 2010.
The African banking sector mirrors this global trend, with a total of $22.3 billion in net profits in 2022, showing an average annual growth of about eight per cent since 2021. Africa’s banking industry even outperformed the global trend, achieving an ROE of 15 per cent in 2022 and an expected 16 per cent in 2023. Some African banks stand out as among the most profitable globally, driven by higher interest rates that have put an end to years of margin compression.
Within Africa, Nigerian banks reported more than $2 billion in profits in 2022, and the ROE is projected to improve to 21 per cent this year, potentially exceeding the cost of equity.
Partner and Head of McKinsey’s Fintech and Payments practice for East Europe, the Middle East, and Africa, Mayowa Kuyoro, noted that, “the oscillating interest rate environment will affect Nigeria’s transition, but exactly how remains to be seen.
“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.”
Despite the challenges, Nigerian banks have a significant opportunity to create value. The McKinsey analysis highlights several priorities that can help these institutions not only survive but thrive. According to the report, banks ought to harness technology and artificial intelligence to enhance productivity, talent utilisation, and the delivery of products and services.
This includes adopting AI and advanced analytics, deploying process automation, cultivating a cloud-based, platform-oriented architecture, and enhancing capabilities to address technology risks. It furthered that banks can achieve success by pursuing economies of scale in their transaction business, potentially through mergers and acquisitions or strategic partnerships.
The report also notes that an integrated omnichannel approach, combining automation and human interaction, can help banks serve their customers effectively. Exploring third-party distribution options and embedding financial services in platforms and marketplaces is also recommended.
With evolving risk landscapes including macroeconomic challenges, changing regulations, cybersecurity threats, and the integration of advanced analytics and AI, the McKinsey & Company, the 2023 Global Banking Annual Review, opines that banks should focus on elevating their risk management functions as potential differentiators.
Kuyoro also emphasised, that “Nigerian institutions will need to examine each of their businesses to assess where their competitive advantages lie and their capacity to offer products in high demand during a time when risk capacity is broadening, and clients and customers are searching for the highest deposit yields.”
As Nigerian banks navigate the ‘Great Banking Transition,’ their ability to adapt to changing circumstances and capitalize on new opportunities will be crucial to their continued success in this dynamic financial landscape.
