McKinsey review: Finnish banking more profitable than in a long time

Press release, November 8, 2023

Banking profits are up, thanks to rising interest rates, but financial institutions globally need to reinvent themselves in the face of major structural and macroeconomic shifts. According to a recent review by McKinsey, banks' return on equity (ROE) is expected to rise globally to 13 percent in 2023, which means an increase compared to 12 percent the previous year. Globally, banks will also make record profits in 2023, totaling up to $1.4 trillion (€1.3 trillion). A similar development can be seen in the Finnish banking market.

The profitability of Nordic banks has historically been higher than the European average, but their income to assets has lagged behind European peers. The profitability of Finnish banks is also on the rise, and the return on equity is predicted to rise to more than 10 percent, which is significantly higher than the European (7 percent) and somewhat higher than the global average (9 percent)

"Banking in Finland is currently more profitable than it has been in a long time. However, the market situation becomes more challenging for banks as interest rates level off and financing costs rise. Even though the profitability of Finnish banks is currently good, given the rising costs, economic uncertainty and new competitors, it is important that banks continue to invest in innovative strategies and make extensive use of technology," says Sami Jormalainen, McKinsey consultant focused on the financial sector.

The financial sector is at a turning point

According to McKinsey's review, the recent good results are due to the sharp rise in interest rates. Higher interest rates enabled a long-awaited improvement in net interest margins, boosting industry profits globally by around $280 billion (€260 billion) in 2022. One aspect of banking hasn’t changed, however: the price-to-book ratio, which was at 0.9 in 2022, and has remained unchanged since the 2008 financial crisis.

Significant changes have already taken place in the financial sector. Businesses traditionally carried out through banks' balance sheets are now managed by new types of players. These often have lighter capital requirements and are subject to less or different regulation. This transition is progressing rapidly, e.g. with asset managers, capital investors and new payment service providers.

"More than 70 percent of the growth in the financial sector between 2015 and 2022 took place mainly outside the balance sheets of traditional banks. Insurance companies, pension funds, state investment funds, private equity investors and asset managers, among others, have taken a large part of the growth. This change is not a new phenomenon, but in our view it is gaining strength. In the long run, the return on equity of global banks may shrink and the positive development seen now may remain short-lived," says Jormalainen.

Securing competitiveness is important in a changing business environment

Financial institutions must adapt to the changing business environment in order to respond to the growing competition. Banks should consider in which business operations it makes sense for them to be involved in and how those operations should be organized. For example, in business operations based on economies of scale, such as payment services, banks should find ways to significantly increase scale, partner with other service providers, or even consider selling their operations. In traditional balance sheet-based businesses, banks should, on the other hand, strive to increase flexibility by optimizing securitization practices.

"Whenever we talk about banks, we talk about risks. Banks must improve their ability to react to changing risks, such as the adequacy of technological know-how, and invest in risk management in their business operations. In order to improve efficiency and develop services and products, banks should adopt solutions based on artificial intelligence and consider how to expand their use," says Jormalainen.

More information: "McKinsey review: Finnish banking more profitable than in a long time". The Finnish review is based on a report published by the McKinsey Global Institute (MGI) in October 2023: "Global Banking Annual Review 2023: The Great Banking Transition".

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mari_muoniovaara@mckinsey.com

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