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Chart: One Reason a Brexit Makes Sense

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Chart: One Reason a Brexit Makes Sense

Chart: One Reason a Brexit Makes Sense

The UK escapes a swath of troubled loans and fiscal problems.

The Chart of the Week is a weekly Visual Capitalist feature on Fridays.

Economic authorities and pundits have been vocal about the potential economic consequences of a Brexit.

The Bank of England said a “Leave” vote would increase unemployment, stoke inflation, slow economic growth, and prompt consumers and businesses to delay spending. The results would be recessionary.

The IMF warned that leaving the EU would cause “severe regional and global damage” for years to come.

The main argument here is that a lack of access to the single market will hurt the UK economy, and this could prove to be very true in time.

Market, Schmarket

While keeping economic ties to the single market is an important point to consider, the UK also gains a distinct advantage from maintaining a further distance from parts of the EU ecosystem.

Why? Because parts of Europe are still an economic mess, and things aren’t getting better. Just look to the recent banking mess in Italy and non-performing loans (NPLs) as an example.

Historical NPLs (Data from IMF)
Historical NPLs according to IMF

Italian banks are currently being crushed by €360 billion in non-performing loans. According to the European Banking Authority, they make up 16.9% of all lending as of March 2016, and are unlikely to be paid in full. As a result, bank stock prices in Italy have plummeted.

Banca Monte dei Paschi di Siena, Italy’s third-largest bank by assets, is now trading for €0.31, which is a mere 15% of its 52-week highs at €2.04. UniCredit, the country’s largest bank with just under €1 trillion in assets, is trading at one-third of what it was worth a year ago.

To help solve the disaster, the ECB’s Mario Draghi is now backing a public bailout of Italy’s banking sector.

Outside of Italy

Portugal has a similar banking crisis brewing. Non-performing loans have mounted to 18.5%, and Prime Minister Antonio Costa is also publicly looking for a solution to help Portuguese banks.

Even Germany, which is typically rock-solid, has its own banking issues. As we covered a couple of weeks ago, the country’s largest bank, Deutsche Bank, has seen its value collapse as it has been engulfed by scandals, record losses, missed stress tests, and poor planning.

While access to markets is important for the UK, keeping a distance from flailing European banks also seems like it could be a wise choice in the long run as well.

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Where the World’s Banks Make the Most Money

Last year, the global banking industry cashed in an impressive $1.36 trillion in profits. Here’s where they made their money, and how it breaks down.

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Where the World’s Banks Make the Most Money

Profits in banking have been steadily on the rise since the financial crisis.

Just last year, the global banking industry cashed in an impressive $1.36 trillion in after-tax profits ⁠— the highest total in the sector seen in the last 20 years.

What are the drivers behind revenue and profits in the financial services sector, and where do the biggest opportunities exist in the future?

Following the Money

Today’s infographic comes to us from McKinsey & Company, and it leverages proprietary insights from their Panorama database.

Using data stemming from more than 60 countries, we’ve broken down historical banking profits by region, while also visualizing key ratios that help demonstrate why specific countries are more profitable for the industry.

Finally, we’ve also looked at the particular geographic regions that may present the biggest opportunities in the future, and why they are relevant today.

Banking Profits, by Region

Before we look at what’s driving banking profits, let’s start with a breakdown of annual after-tax profits by region over time.

Banking Profit by Year and Region ($B)

 2009201020112012201320142015201620172018
Global ($B)$388$530$635$703$859$963$1,070$1,065$1,144$1,356
United States$19$118$176$263$268$263$291$275$270$403
China$95$135$174$225$255$278$278$270$301$333
Western Europe$78$34$21-$70$28$95$154$159$186$198
Rest of World$196$243$265$285$309$327$348$361$387$421

In 2018, the United States accounted for $403 billion of after-tax profits in the banking sector ⁠— however, China sits in a very close second place, raking in $333 billion.

What’s Under the Hood?

While there’s no doubt that financial services can be profitable in almost any corner of the globe, what is less obvious is where this profit actually comes from.

The truth is that banking can vary greatly depending on location ⁠— and what drives value for banks in one country may be completely different from what drives value in another.

Let’s look at data and ratios from four very different places to get a sense of how financial services markets can vary.

CountryRARC/GDPLoans Penetration/GDPMargins (RBRC/Total Loans)Risk Cost Margin
Global Average5.1%124%5.0%0.8%
United States5.4%121%5.0%0.4%
China6.6%147%6.0%1.4%
Singapore13.0%316%4.6%0.4%
Finland3.4%133%2.8%0.2%

1. RARC / GDP (Revenues After Risk Costs / GDP)
This ratio shows compares a country’s banking revenues to overall economic production, giving a sense of how important banking is to the economy. Using this, you can see that banking is far more important to Singapore’s economy than others in the table.

2. Loans Penetration / GDP
Loans penetration can be further broken up into retail loans and wholesale loans. The difference can be immediately seen when looking at data on China and the United States:

CountryRetail LoansWholesale LoansLoan Penetration (Total)
United States73%48%121%
China34%113%147%

In America, banks make loans primarily to the retail sector. In China, there’s a higher penetration on a wholesale basis — usually loans being made to corporations or other such entities.

3. Margins (Revenues Before Risk Costs / Total Loans)
Margins made on lending is one way for bankers to gauge the potential of a market, and as you can see above, margins in the United States and China are both at (or above) the global average. Meanwhile, for comparison, Finland has margins that are closer to half of the global average.

4. Risk Cost Margin (Risk Cost / Total Loans)
Not surprisingly, China still holds higher risk cost margins than the global average. On the flipside, established markets like Singapore, Finland, and the U.S. all have risk margins below the global average.

Future Opportunities in Banking

While this data is useful at breaking down existing markets, it can also help to give us a sense of future opportunities as well.

Here are some of the geographic markets that have the potential to grow into key financial services markets in the future:

  1. Sub-Saharan Africa
    Despite having 16x the population of South Africa, the rest of Sub-Saharan Africa still generates fewer banking profits. With lower loan penetration rates and RARC/GDP ratios, there is significant potential to be found throughout the continent.
  2. India and Indonesia
    Compared to similar economies in Asia, both India and Indonesia present an interesting banking opportunity because of their high margins and low loan penetration rates.
  3. China
    While China has a high overall loan penetration rate, the retail loan category still holds much potential given the country’s population and growing middle class.

A Changing Landscape in Banking

As banks shift focus to face new market challenges, the next chapter of banking may be even more interesting than the last.

Add in the high stakes around digital transformation, aging populations, and new service opportunities, and the distance between winners and losers could lengthen even more.

Where will the money in banking be in the future?

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Why Anti-Money Laundering Should Be a Top Priority for Financial Institutions

Anti-money laundering cost financial institutions about $25.3B in 2018. How can organizations improve their processes & gain a competitive advantage?

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Why AML Should be a Top Priority for Financial Institutions

The to-do list for any financial executive is surely daunting. From navigating technology changes to managing talent effectively, there’s many initiatives competing for attention.

One issue that’s been in the headlines for many years is anti-money laundering (AML). When criminals are able to successfully hide the illicit origins of their cash, both the financial institution and society suffer. So, what makes AML more important now than it has been in the past?

Rising up the Priority Ladder

Today’s infographic from McKinsey & Company explains the factors which have brought anti-money laundering urgently to the forefront in recent years.

1. Regulatory Action

Enforcement actions related to AML have been on the rise. Since 2009, regulators have levied approximately $32 billion in AML-related fines globally.

2. Threat Evolution
Criminals are using more sophisticated means to remain undetected, including globally-coordinated technology, insider information, and e-commerce schemes.

3. Reputational Risk

AML incidents put a financial institution’s reputation on the line. There’s a lot at stake: today, the average value of each of the top 10 bank brands is $45B.

4. Rising Costs

Most AML activities require significant manual effort, making them inefficient and difficult to scale. In 2018, it cost U.S. financial services firms about $25.3B to manage money laundering risk.

5. Poor Customer Experience

Compliance staff must have multiple touch points with a customer to gather and verify information. Perhaps not surprisingly, one in three financial institutions have lost potential customers due to inefficient or slow onboarding processes.

It’s no wonder anti-money laundering has now become a top priority for many CEOs in the financial industry.

A Wave of Innovation

In the last five years, there has been an explosion of “RegTech” startups—companies that address regulatory requirements using technology.

Global RegTech Investments, 2014-2018

YearAmount Invested (USD)
2014$923M
2015$1,110M
2016$1,150M
2017$1,868M
2018$4,485M

Over 60% of these are focused on solving Know Your Customer (KYC) and AML issues. What does this technology look like in practice?

Customer onboarding

A hypothetical U.S. retail firm, ABC Electronics, applies online to open an account at AML Innovators Bank. Their information is verified and screened using a fully automated process.

If they are determined to be a lower-risk client, they will be fast-tracked through the approval process with decisioning in six hours or less. For high-risk clients, decisioning occurs within about 72 hours.

Transaction Monitoring

ABC Electronics requests to send multiple international wire payments to various beneficiaries. Each transaction is automatically screened based on various factors:

  • A same name or subsidiary transfer carries the lowest risk
  • Transfers to a known, similar industry in a high-risk jurisdiction carry medium risk
  • Transfers to an unknown industry in a high-risk jurisdiction carry high risk

These transaction scores, combined with algorithms that track a client’s expected vs. actual transaction behavior, will update ABC Electronics’ risk rating in real time.

Management oversight

As risk updates occur, ABC Electronics’ rating is integrated into AML Innovator Bank’s overall portfolio risk.

Senior risk management teams will be able to view a heat map that highlights the highest risk areas of the business.

Structural Change, Big Gains

Just as financial crimes continue to evolve, so do AML schemes.

How can organizations stay ahead of the game? They can focus on actively managing risk, deliberately investing in technology and analytics, and prioritizing areas where RegTechs will have the highest near-term impact.

By investing in AML, financial institutions create competitive advantages:

  • Improved efficiency
  • Superior customer experience
  • Scalability
  • Readiness to adapt to new regulations
  • Reduced reputational risk
  • Ability to attract top talent

With such benefits on the table, one thing is clear: Anti-money laundering efforts are more important now than they have ever been.

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