McKinsey – Global Banking Annual Review, 2023

The banking industry has faced numerous challenges in recent years, including increased oversight, digital innovation, and new competitors. These challenges have come at a time when interest rates were at historic lows. Despite these difficulties, the industry has seen a favorable wind return in the past 18 months, resulting in the best period for global banking since 2007. Rising interest rates have boosted profits in a more benign credit environment. However, significant changes have occurred beneath the surface of the banking industry. Traditional banks have seen a shift in balance sheets and transactions to nontraditional institutions and capital-light markets. This includes digital payment specialists, alternative asset management firms, insurance and pension funds, sovereign wealth funds, and private capital. As a result of this movement, the scope of the Global Banking Annual Review has been broadened to include all financial institutions except insurance companies. This year's review focuses on the "Great Banking Transition" and analyzes its causes and effects. It also examines whether the improved performance and recent rise in interest rates can change the dynamics of the transition. The review concludes with five priorities for financial institutions to reinvent and future-proof themselves. These priorities include exploiting leading technologies, flexing and potentially unbundling the balance sheet, scaling or exiting transaction business, leveling up distribution, and adapting to the evolving risk landscape. The recent upturn in the industry can be attributed to the increase in interest rates globally, which has led to an improvement in net interest margins and boosted profits. However, there has also been volatility in the sector, resulting in the collapse or rescue of high-profile banks. Performance within the industry varies widely, with some institutions generating high returns on equity and strong growth, while others lag behind. Operational excellence and decisions relating to cost, efficiency, and customer retention are crucial for banking success. Geographical divergence is also notable, with banks located along the crescent formed by the Indian Ocean performing exceptionally well. Overall, the banking industry faces the challenge of adapting to a changing landscape and leveraging technology effectively to remain competitive.