Wall Street banks need fundamental business model shift, McKinsey says

September 14, 2016 8:05 AM EDT

The Wall St. sign is seen outside the door to the New York Stock Exchange in New York's financial district February 4, 2014. REUTERS/Brendan McDermid


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By Olivia Oran

(Reuters) - Despite slashing billions in costs and retrenching from key businesses since the financial crisis, Wall Street banks still have not done enough to repair and restructure, according to a new report.

McKinsey & Co on Wednesday released an annual report about banks, saying Wall Street firms continue to suffer from weak profits, high costs and strategic uncertainty.

The report expressed frustration with the lack of progress the firm's banking clients have shown.

"The inescapable reality is that the industry’s restructuring efforts to date have failed to produce sustainable performance," the report said. "A more fundamental change is required, based on the realization that for most banks, the traditional model of global capital markets and investment banking is no longer an option."

The top 10 global banks in particular are struggling to adapt to the post-financial crisis environment, as they grapple with high operating costs, low interest rates and the key fixed income trading business under revenue pressure.

These firms posted a combined return on equity of 7 percent in 2015, below the 10 percent minimum that analysts typically expect banks to make to meet their cost of capital.

Capital market and investment banking revenues have declined for the top 10 banks since 2012 by 10 percent to $144 billion. These firms have lost share to regional and local banks, which have seen their revenue rise 14 percent over the same time period.

To boost their returns, McKinsey said banks should consider a range of options including selling their products individually to clients rather than as a package of bundled services; better allocating their balance sheets to generate more profit; utilizing digital technology and robotics; participating in industry utilities that can help cut costs; and addressing risk and conduct among bank employees.

The report pointed to a number of industries outside banking that have successfully restructured, including telecommunications, semiconductors and automobiles.

"The road to a sustainable future remains open... but only if they make tough choices and bold actions now," the report concluded.

(Reporting by Olivia Oran in New York; Editing by Cynthia Osterman)



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