Banks urged to exit low-return businesses to clinch $7t value: analysts

They must also simplify business models and embrace their “tech” identity. 

There is $7t in value that banks globally can create over the next five years. But if they want to seize a slice of this pie, they must be ready to make drastic changes– including exiting low-return business lines and asset classes, and embracing their tech identity.

“We estimate that at least $7 trillion in value can be created. This corresponds to roughly doubling current valuations in the coming five years by taking a fair share of expected growth and improving price-to-book ratios,” BCG analysts said in a report, “To Seize a $7 Trillion Opportunity, Banks Need Bolder Strategies for Serving Customers and Society” published in mid-January 2024.

In the report, BCG noted that banks are unlikely to return to the profitability levels and valuations that existed prior to the global financial crisis. 

However, the management consulting firm’s report noted that banks still have the opportunity to earn more than their cost of equity on a sustainable basis and increase valuations.

To create value, banks are advised to design a zero-based business model that also pushes for productivity to go 40% higher than what is considered normal today.

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Banks are also advised to exit business lines or, at a minimum, reduce capital exposure to low-return asset classes. 

They must then invest in new areas of strategic growth with more favorable levels of return on equity, BCG said.

Banks are also called to design a drastically simplified business model that leverages artificial intelligence, front-to-back digitisation, and an actively managed balance sheet.

“The new operating model should help deliver vastly more impact from data and technology as well as help build strategic partnerships and capabilities for competitive advantage,” BCG noted, adding that banks must now embrace the identity of a “tech product company” and not just “tech company” as a foundation for a new organisation model and talent.

This paradigm reportedly places emphasis on business teams to upskill themselves as “product owners” with expectations of rapid customer centric feature iterations and prioritizations, continuous test and learn, and collaborative working with technical teams.

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“It is no longer viable for banks to approach transformation incrementally. They cannot continue to build, bit by bit, on legacy setups that can actually do more to hold them back than to propel them forward,” BCG warned. 

Instead, banks need to holistically examine their entire organization and blaze a clear strategic path that enables them to meet their obligations—not only to customers but also to society as a whole—by driving economic growth, helping to finance the climate transition, and creating lasting shareholder value, it added.