Bank Profits Surge by $280,000,000,000 Globally Due to Sharp Increase in Interest Rates: McKinsey

Banks are collectively posting their most substantial profits in a decade, according to a new assessment from the consulting giant McKinsey.

McKinsey says the rise in interest rates has paved the way for banks to widen their net interest margins and earn more on loans and mortgages, with the industry’s global profits growing by roughly $280 billion.

“The recent upturn arises from the sharp increase in interest rates in many advanced economies, including a 500-basis-point rise in the United States. The higher interest rates enabled a long-awaited improvement in net interest margins, which boosted the sector’s profits by about $280 billion in 2022 and lifted return on equity (ROE) to 12% in 2022 and an expected 13% in 2023, compared with an average of just 9% since 2010.”

McKinsey says the banking industry’s net income jumped from about $1 trillion in 2021 to $1.3 trillion in 2022, with $1.4 trillion estimated for 2023. The rise in profit comes amid months of deposit outflows at the largest banks in the US, with $84.5 billion in deposits exiting JPMorgan Chase, Wells Fargo and Citigroup in Q3 of this year, and $44.35 billion leaving Bank of America, Morgan Stanley and BNY Mellon in the same quarter.

McKinsey forecasts the future for financial institutions will be shaped by four main global trends: higher interest rates and stubborn inflation, technological progress, growing governmental scrutiny over alternative financial institutions, and shifting geopolitical tensions.

“First, the macroeconomic environment has shifted substantially, with higher interest rates and inflation figures in many parts of the world, as well as a possible deceleration of Chinese economic growth. An unusually broad range of outcomes is suddenly possible, suggesting we may be on the cusp of a new macroeconomic era.

Second, technological progress continues to accelerate, and customers are increasingly comfortable with and demanding about technology-driven experiences. In particular, the emergence of generative AI could be a game changer, lifting productivity by 3 to 5% and enabling a reduction in operating expenditures of between $200 billion and $300 billion, according to our estimates.

Third, governments are broadening and deepening regulatory scrutiny of nontraditional financial institutions and intermediaries as the macroeconomic system comes under stress and new technologies, players, and risks emerge. For example, recently published proposals for a final Basel III “endgame” would result in higher capital requirements for large and medium-size banks, with differences across banks.

And fourth, systemic risk is shifting in nature as rising geopolitical tensions increase volatility and spur restrictions on trade and investment in the real economy.”

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