Current trends and the situation in the banking sector

The accelerated pace of change of our time requires companies to adapt quickly in a variety of ways. The driving forces behind this change include technological innovations, cultural and social changes, climate-related challenges and economic changes. The uncertainty that already existed has been exacerbated by the COVID-19 pandemic. Financial institutions often face the challenge of adapting quickly and effectively to new circumstances, as it is difficult to predict the impact of various interrelated trends on the market. While some developments are favourable for banks, others have a negative impact on the business. This difficulty in predicting future developments and their impact on the market emphasises the importance of systematically monitoring trends in the banking sector.

Challenges and developments in the banking sector 2020-2023

The banking sector has travelled a difficult path between 2020 and 2023. In the face of tighter regulation, digital innovation and new market entrants, institutions have had to realign their strategies at a time of historically low interest rates. The last few months have brought additional turbulence, including liquidity problems and bank insolvencies. Nevertheless, the tide seems to have turned for the sector as a whole: Looking at the period from July 2022 to December 2023, the global banking sector is experiencing its best period since at least 2007. Rising interest rates have bolstered profits in a more favourable lending environment.

Financial recovery and profitability

The global recession and pandemic have hit us hard. They have impacted all organisations and functions. Following these crises, it is crucial to develop and manage innovative strategies in the banking business.

Overall, 2022 and 2023 proved to be the most profitable years for banks in more than a decade, although there were significant differences between individual institutions. As the chart below shows, the return on equity (ROE) of financial institutions worldwide rose to 12 per cent in 2022 and is expected to reach 13 per cent in 2023. This is significantly higher than the average ROE of 9.1 per cent over the last 13 years.

Global trends and their impact

Market peaks, examples of success and sources of disruption in banking can be attributed to several global trends that are shaping a more volatile world.

Four specific trends - an uneven macroeconomic outlook, increased government regulation and oversight, technological disruption and systemic risk - are key drivers of financial institution performance. In particular, technology and the macroeconomy have changed significantly compared to the past and these changes are expected to have a long-term impact.

Growth and inflation expectations vary widely from region to region, heightening concerns about volatility and the possibility of entering a new era in the global economy with different outcomes. Given the pressures on the macroeconomic system and the emergence of new technologies, players and risks, governments around the world are expanding and strengthening prudential oversight of financial intermediaries. In some areas, the existing regulatory framework has been tightened. Technologically disruptive trends are described in another blog post, as they have a significant impact on the current and future direction of banks and financial institutions.

Although global economic interdependence continues to be characterised by cross-border flows of goods, services, people and data, increasing geopolitical tensions, the rise in trade-restrictive measures and unforeseen major events such as the COVID-19 pandemic have increased volatility and brought with them new, sometimes far-reaching risks. For example, the Russian invasion of Ukraine has triggered price fluctuations on the energy markets and raised concerns about energy supply and security in some countries.

The big change in banking

These four trends also play an important role in the so-called Great Transformation of banking. In recent years, there has been a notable trend of assets and customers moving from traditional, capital-intensive financial institutions such as universal banks to non-traditional institutions with lower capital requirements. These non-traditional financial institutions include a range of companies, including payment systems, financial data and infrastructure companies, independent wealth and asset managers, private equity and investment companies, and fintechs. This shift represents an ongoing development in the industry.

Would you like to find out more about exciting topics from the world of adesso? Then take a look at our previously published blog posts.

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