For banks, 2022 has been a tumultuous year of multiple shocks and growing uncertainty. Banks rebounded from the pandemic with strong revenue growth thanks to higher margins and Tier 1 capital ratios at their highest in 20 years.
But the context has changed dramatically, with a series of interrelated shocks, some geopolitical and others lingering economic and social effects of the pandemic, exacerbating fragilities.
While some banks in some geographic areas are doing very well, more than half of the banks globally are earning less than the cost of capital.
Revenue increased $345 billion as growth picked up, but profitability continues to lag. Bank profitability reached a 14-year high in 2022, with an expected return on equity between 11.5% and 12.5%.
Worldwide revenue grew by $345 billion; This growth was driven by a sharp increase in net margins, as interest rates rose after languishing for years at their cyclical bottoms. Ample liquidity and relatively low risk contributed to the rise.
In 2022, bank liquidity, measured as the ratio of loans to deposits, is around 90%, while Covid-19 provisions are still being rewritten; which indicates that, for now, the global banking system is comfortably in tier 1 capital ratios between 14% and 15%, the highest in history.
After a decade of low returns, 2022 represents a new era in banking: the improvement in margins, which increased from 252 basis points in 2021 to 262 basis points in 2022. This represented 60% of revenue gains. Almost all segments of banking have seen improvements: capital markets and investment banking were the exception.
The biggest growth has been in wealth management, which posted 7% growth between 2021–2022, well above 4% between 2019–2021. The biggest change has been in everyday banking (checking accounts, deposits and payment transactions), which saw 6% growth between 2021–2022 due to high money market rates, compared to an average annual decline of 4 % between 2019–2021.
As the economy slows, the divergence between banks will widen further. All banks face a long-term slowdown in growth
term. Banks in Asia-Pacific may benefit from a stronger macroeconomic outlook, while European banks face a bleaker outlook: in the event of a prolonged recession, we estimate that the return on capital of global banks could fall to 7% by 2026, and below 6%. for European banks. The net impact will likely be a further concentration of growth in emerging Asia, China, Latin America and the United States. We expect these regions to account for around 80 percent of the estimated $1.3 trillion growth in global banking revenue between 2021 and 2025.
Increase
Behind this global picture are some important regional variations in bank performance, notably sharp divergences within and between emerging markets, with individual banks and banking sectors in some countries experiencing rapid growth and higher profitability, while others are experiencing sharp slowdowns.
Such is the case of the Dominican Republic, its financial system shows clear signs of strength and stability.
According to the Central Bank, at the end of the July-September 2022 quarter, both the assets and liabilities of the Dominican financial system showed year-on-year growth of 12.2%.
Credit to the private sector expanded by RD$170,198 million, equivalent to 15.5% as of September 2022. The benefits obtained by financial intermediaries totaled RD$40,864 million, for an annualized return on average equity (ROE) of 25.3%, in so much so that the return on average assets (ROA) was verified at 2.6%; as shown by the data from the report on the preliminary results of the Dominican economy January-September 2022, published by the Central Bank of the Dominican Republic.
Profitability, as measured by return on capital, still has room for improvement when viewed over the long term. Despite the post-Covid-19 rebound, the return on capital remains well below where it was before the 2008 financial crisis and globally only slightly above the cost of capital.
In fact, more than half of the world’s banks in 2022 will still have a return on capital below the cost of capital.
The lingering effects of Covid-19 and geopolitical tensions have shaken the global economy and are affecting the financial sector. The long-term effects of the Covid-19 pandemic are still being felt, from supply chain disruptions to people’s changing attitudes towards employment.
The Russian invasion of Ukraine and rising tensions over Taiwan marked the return of geopolitics as a disruptive force after decades of relative stability, exacerbating pandemic-related effects and creating new shocks, notably a crisis of power supply in Europe. This combination of disease and armed conflict turned out to be complex for the world economy. Together, they create a highly uncertain environment.
Navigating the next era, banks face some key challenges and could take measured steps to seize the significant opportunities in the new era of sustainable finance. While banks are becoming more active in sustainable finance, success in scaling the business will depend on how well they address some critical challenges.
In a McKinsey survey of bank executives with active roles in sustainable finance in their organization, 45 of the responses highlight the importance bank leaders are placing on sustainable finance and reveal gaps in banks’ abilities to capture the emerging.
Opportunities
Some 70% of bankers indicate that climate transition finance is one of the top five priorities of their bank’s CEOs, predicting a significant increase in attractiveness and reduced risk in technology transition finance in the next eight years. However, bank leaders report a significant lack of necessary capabilities outside of solar and wind power.
Respondents predict that climate solutions, including grid-scale storage and infrastructure, green hydrogen, green fuels, biomass and CCS, will see increasing demand for financing.
At the same time, a much smaller percentage of bankers say their banks have short-term capabilities to finance each of these areas.
In accordance with these times of constant change, the Dominican Republic’s main axis is the accelerated transformation of means of payment and financial services, which will be addressed from a multidimensional perspective, simultaneously involving: innovation, technology and cybersecurity to offer an ecosystem of services complete.
In the case of the Dominican Republic, in order to build business models that can overcome the disruption in the challenges implied by financial contributions to face climate change, it will first be necessary to integrate digital banking services that allow a continuous capacity for innovation, ensuring the benefit of technology and human talent as the first step.
“The challenge of the banking sector at this time will be to respond to the demands of a global market that many countries face, inflationary situations and volatile markets; The idea will be to ensure economic well-being, developing initiatives that can minimize the impact in the future,” said Antonio Novas, partner and territorial manager of