Corona to cost African banks almost $5 trillion - McKinsey

Banks in Africa could lose  between $1.5 trillion to $4.7 trillion in revenue in four years to 2024 arising from Covid-19 economic turmoil, according to a survey by McKinsey.

In its latest annual banking review dubbed 'a test of resilience: Banking through the crisis and beyond', the US-based management consulting firm said affected as credit losses cascade through the economy and demand drops. 

According to the survey, the pandemic will present a dual problem for banks with the first one being severe credit losses, likely through late 2021; a situation almost all banks are expected to survive.

Then, amid a muted global recovery, banks will face a profound challenge to ongoing operations that may persist beyond 2024.

''In our base-case scenario, $3.7 trillion of revenue will be forgone—the equivalent of more than a half year of industry revenues that will never come back,'' McKinsey researchers said in the report. 

Banks in Africa enjoyed one of the highest Return On Equity (ROE)globally, however, the overall ROE is expected to half at 7.6 percent in the next two years, while revenues after risk may decline by 15 per cent in a muted recovery scenario.

The survey anticipates the ROE to continue its decline, from 8.9 per cent in 2019 to 5.4   in 2020 to 1.5 per cent in 2021.

The trough in 2021, ROE would fall to −1.1 per cent in North America, −1.8 per cent in Europe, and −0.2 per cent in developed Asia.

In the short term, banks will be affected by cascading credit losses resulting in 50 per cent impact on revenues while in the long term, continued pressure on margins and moderate volume growth might dwarf the revenue growth to half of the pre-Covid-19 levels.

In emerging economies, one of the most formidable challenges facing banks will be credit losses.

For instance, Kenya has seen a rise in provisioning over the last two quarters; and banks have restructured around 47 per cent of their loans, worth Sh1.38 trillion, to alleviate the impact on borrowers and shield future income. 

This is likely to get worse in early 2021 before starting on the path to recovery. Kenyan banks have partially mitigated the revenue drop through gains on the government securities in their treasuries.

According to Carolyne Gathinji, associate partner with McKinsey & Company in Kenya, as banks start the uphill climb back towards pre-crisis ROE, they will need to pull on three levers: increasing revenues, managing costs, and better managing their equity capital. 

''The burden of proof will therefore lie in how they are able to manage costs and leverage digital channels going forward,'' Gathinji said. 

The survey, however,  notes that global banking entered the crisis well capitalised and is far more resilient than it was 12 years ago.  

McKinsey sets out three imperatives that will position banks well against the trends now taking shape. 

According to management consultants, lenders must embed newfound speed and agility, identifying what worked well in their to the crisis and finding response ways to preserve those practices. 

They also urge banks to fundamentally reinvents their business model to sustain a long winter of zero percent interest rates and economic challenges, while also adopting the best new ideas from digital challengers.