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Why It’s Time for Banks to Make Bold Late-Cycle Moves



View the full report from McKinsey & Company here

Late Cycle Banks McKinsey Infographic

Why It’s Time for Banks to Make Bold Late-Cycle Moves

An economic downturn is approaching on the horizon. Amid low interest rates and a manufacturing slowdown, industries and investors alike are scrambling to prepare as the window of opportunity closes.

Banking is no different. After a decade of expansion, the industry is showing many signs of a late-cycle economy. On top of this, a staggering 60% of banks are destroying value. Today’s infographic from McKinsey & Company explores the steps banks can immediately take to succeed in the next economic cycle.

How is Value Created?

In the banking sector, three main factors contribute to value creation:

  • The location of the bank
  • The scale of its operations
  • The effectiveness of its business model

Given that geographic reach is mostly out of a bank’s control, and scale takes time to build, banks must focus on their business model.

There are three universal business model levers that all banks can immediately act on to change their destiny.

1. Risk Management
Banks can protect returns in an economic downturn by managing risk. For example, new machine-learning models can predict the riskiest customers with 35 percentage points more accuracy than traditional models.

2. Productivity
To radically reduce costs, banks can transfer non-differentiating activities to third-party “utilities”, through outsourcing, carve-outs, or partnerships. This has the potential to increase return on equity by as much as 100 basis points.

3. Revenue Growth
When customers are satisfied, they generate more value for banks—and vice versa. For instance, customers who report low satisfaction with their mortgage experience are almost seven times more likely to refinance with a different bank.

By materially improving decisive points in the customer experience, banks can increase revenue and reduce churn rates within 12-18 months.

The Four Banking Archetypes

Beyond these universal performance levers, a bank should prioritize late-cycle economic decisions based on the archetype it falls under.

  • Market leaders are top-performing financial institutions in attractive markets
  • Resilients are top-performing operators despite challenging market conditions
  • Followers are mid-tier organizations generating returns due to favourable market conditions
  • Challenged banks are poor performers in unattractive markets

Different archetypal levers are available depending on each bank’s unique circumstances.

  1. Ecosystem
    Banks can find new revenue streams across and beyond banking, leveraging customer relationships and white-label partnerships.
  2. Innovation
    Banks can create value by developing new methods, ideas, products and services. To implement this effectively, banks must set goals for the return on innovation as well as the timeframe.
  3. Zero-based budgeting
    By justifying expenses for each new period, banks can drastically reduce costs. This involves starting from a “zero base” rather than prior years’ numbers.

Here’s how banks across the various archetypes can take action:

Zero-based Budgeting
Market Leaders

For example, while market leaders’ large capital base is best used for ecosystem and innovation plays, challenged banks need to radically rethink their business model or merge with similar banks.

Reinvent, Scale, or Perish

As the late-cycle economy slows even further, no banks can afford complacency. In fact, history has shown that 35% of market leaders drop to the bottom half of peers in the next cycle.

Now is the time for banks to take bold action through universal and archetypal levers—or risk being left behind.

For a more detailed breakdown of the actions that banks can take in this market environment, check out the full report by McKinsey & Company.

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3 Lithium Insights for Today’s Investors

Discover three key insights that could shape the future of lithium, from soaring demand to supply challenges.





The following content is sponsored by iShares

3 Essential Insights for Lithium Investors

The lithium market is experiencing rapid growth, with the critical mineral witnessing a 30% rise in consumption in 2022. But what is causing this lithium boom? 

Our sponsor, iShares, takes a look at three insights that are shaping the future of the lithium landscape.

1. Soaring Demand Until 2050

The rapid global shift toward clean energy has set the stage for a surge in lithium demand. 

Projections from the IEA show that demand for the so-called white gold is expected to increase tenfold by 2050 in the Net Zero Emissions scenario.

2022 (kt)2050P (kt)
Electric Vehicles69 1104
Grid Battery Storage4 75
Other Uses57 135

The reason for this explosive growth comes primarily from lithium’s pivotal role in lithium-ion battery technologies.

2. Lithium’s Dominance in Battery Technology

Lithium-ion batteries are a central piece of the decarbonization puzzle, and could account for approximately 95% of demand by 2030.

These batteries are used to store electricity generated from renewable sources like solar and wind power and are also the dominant technology powering electric vehicles.

3. Lithium Supply Challenges

As the world shifts toward clean energy technologies, lithium supply and demand dynamics are entering uncharted territory. 

Forecasts suggest that demand for lithium could outstrip supply as early as 2030.

YearDemand (million tons of LCE)Supply (million tons of LCE)

Lithium carbonate equivalent (LCE) represents the lithium content in compounds, expressed in terms of lithium carbonate. This form is a primary processed variant of raw lithium, utilized in batteries and various other applications.

The projected supply-demand imbalance can be attributed to various factors, including reduced production caused by delays in establishing new mines due to technological challenges and financial limitations, as well as geopolitical complexities within the market.

Navigating the Lithium Frontier

As the world gears up for a net-zero emission future by 2050, lithium has a key role to play in this transformation. 

Investors looking to gain exposure to lithium may want to consider an ETF that seeks to track an index composed of companies primarily engaged in lithium mining and/or manufacturing.

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