Turnaround in interest rates flushes money into coffers: Banks are more profitable than they have been since 2007

European banks are not as profitable as institutions in the US or Asia. Nevertheless, the turnaround in interest rates is flushing many additional billions into their coffers. Advisors warn, however, that they should not rest on their laurels. The challenges increase.

According to an analysis, banks worldwide are more profitable than they have been since 2007. McKinsey anticipates better business for the industry overall in the current year, but also increasing investment income for investors. However, in its “Global Banking Annual Review” the management consultancy also points to increasing challenges, for example as a result of the weakening economy.

According to calculations, the average return on equity for banks worldwide will be between 11.5 percent and 12.5 percent in the current year. The industry last reached this level before the recent financial crisis.

McKinsey explained the strong performance in 2022 primarily with significantly higher profit margins thanks to the rise in interest rates. After years of zero and negative interest rate policies, large central banks such as the Fed in the USA and the European Central Bank (ECB) have initiated a turn towards higher interest rates. According to the calculations, the income – i.e. the total income – will increase globally by 345 billion US dollars to 6.5 trillion dollars (around 6.3 trillion euros) in 2022. With the exception of investment banking, growth can be seen in all business areas.

“Even if European banks continue to lag far behind institutions in the USA and Asia in terms of profitability, the industry will see a significant increase in return on equity across the board in 2022,” summarizes Max Flötotto, Head of Banking Consulting at McKinsey in Germany and Austria. together.

Despite the current upswing due to higher interest rates, the management consultancy sees further need for restructuring in the banking sector. “In the event of a prolonged recession, we estimate that global banks’ return on equity could fall to 7 percent by 2026 – and below 6 percent for European banks,” the analysis reads.

“Banks must now take bold steps to build near-term resilience and the foundation for long-term growth.” The consultants include cost management and clearing out balance sheets, as well as building a technological infrastructure “that can withstand cyber attacks”.