Banks across the world would face a cumulative revenue loss of $1.5 trillion to $4.7 trillion between 2020 and 2024 as the potential for near-term economic recovery remains uncertain in wake of COVID-19 pandemic, according to a latest report. In the base-case scenario, $3.7 trillion of revenue will be lost, equivalent of more than a half year of banking industry revenues, McKinsey said in its global banking annual review 2020.
The report, however, maintained that the banks and the financial systems are sufficiently capitalised to withstand the coming shock.
As per McKinsey's global banking annual review report, the coronavirus pandemic will present a two-stage problem for banks - credit loss and operations challenge - in the months and years to come. Amid a muted global recovery, banks will incur severe credit losses likely by late 2021, while they will face a profound challenge to ongoing operations that may persist beyond 2024, the report said.
In anticipation of sharp increase in personal and corporate defaults due to COVID-led crisis, global banks have provisioned $1.15 trillion for loan losses through third quarter 2020, much more than they did through all of 2019. The American research firm projected that in the base-case scenario, loan-loss provisions (LLPs) will exceed those of the Great Recession by 2021.
"Unlike many past shocks, the COVID-19 crisis is not a banking crisis; it is a crisis of the real economy. Banks will surely be affected, as credit losses cascade through the economy and as demand for banking services drops. But the problems are not self-made. Global banking entered the crisis well capitalised and is far more resilient than it was 12 years ago," the report noted.
As the COVID-19 crisis entered tenth month, hopes are high for vaccines and new therapeutics, but victory over the novel coronavirus still lies some nine to 12 months in the future, McKinsey said.
"In the meantime, second and third waves of infection have arrived in many countries, and as people begin to crowd indoors in the months ahead, the infection rate may get worse. As a result, the potential for near-term economic recovery is uncertain. The question of the day is, 'When will the economy return to its 2019 level and trajectory of growth?,' it said.
McKinsey has suggested banks to speed up the shift to digital banking to wring more productivity out of their operations. Banks, like other sectors of the economy, may face a cold winter ahead, but there is the promise of a thaw. The moment is right for banks to affirm their dual role as sources of stability against the pandemic's upheaval and as beacons to the societies and communities they serve in a post-COVID-19 world, it said.
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