Resilience Amid Adversity: The State Of Global Banking

Global banking aced 2023 despite the drama of bank failures.

The banking industry emerged triumphant in 2023, a year that had threatened to be catastrophic. Rapid industry intervention averted the nightmare scenario of a contagion-driven financial crisis fueled by multiple bank failures in the US and Europe.

Last year’s mini-crisis of bank failures was best seen as the result of idiosyncratic management lassitude at the eventually rescued banks. However, the exposed risks inherent in app-based banking and the potential for bank collapse based on rapid mass deposit withdrawals provided a wake-up call for the industry, most pointedly among the rapidly proliferating neobank challengers.

As a result, boosting the current account savings account ratio and improving the “stickiness” of deposits became a central focus for bank CEOs last year.

As in 2022, the net interest margin (NIM) environment was optimal due to tight central bank monetary policy. Last year, a long-absent dynamic entered the fray: positive return on equity, which reemerged after being negative or flat in the 15 years since the global financial crisis of 2007-2009 and averaged 9% last year.

Bank profits in the Asia-Pacific region soared, with many lenders scoring record high net income—even in sclerotic Japan, where the 12-year battle fought by the banking sector against negative interest rates would seem to be ending as that easy money regime draws to a close. China was a notable absentee from the party: A fraught property sector shredded sentiment.

Last year, the global banking industry showed greater cost efficiency and improved asset quality. Still, the direction of travel will be determined by economic growth; central bank base rate moves, particularly from the US Federal Reserve; the demand for credit; and the pace of loan delinquency.

As the cost of capital came into focus and banks looked to shrink cost-to-income (CTI) ratios, the industry shed 60,000 jobs globally last year, the highest tally since the crisis. Investment banking fee wallets collapsed as deal-making and listings shriveled.

At the same time, traditional bank lending faced the threat of a thriving private credit market engineered by the nonbank financial sector. Leveraged buyout funds were more likely to be supplied by a large hedge fund than a big bank and at more competitive rates.

Environmental, social, and governance (ESG) issues remained a dominant theme: in Europe as a total belt-and-suspenders operational input thanks to the tightening of the regulatory straitjacket, and in Asia as companies and banks played catch-up in the sustainability game during the start of an ESG-focused regulatory convergence manifesting in the region.

Sustainable finance dominates across the financing spectrum globally, whether in transition format, which dominates in Japan, or the full-on green/impact issuance typical in Europe and the US and burgeoning in Asia-Pacific, excluding Japan.

In Europe, banks had their most profitable year on record, thanks to the NIM effect, resilient asset quality, and low CTI ratios. Bank for International Settlements capital-requirement metrics were in rude health, with more capital returned to bank shareholders last year than at any other time since the crisis.