Banks must redefine where to compete, who to partner with, and how to deliver value amid multifaceted disruption in the global financial ecosystem. They cannot succeed without active support from governments and cooperative partnerships with regulators.

The So What

Banks are not likely to return to the profitability levels and valuations that existed prior to the global financial crisis. Yet they have the opportunity to earn more than their cost of equity on a sustainable basis and increase valuations.

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.

It is critical for banks to set their sights on this target. The goal is not only to create shareholder value but also to meet their obligations to drive economic growth and finance the climate transition. These aspirations can be reached if banks take a step back, get to the bottom of their performance issues, and set a bold agenda. This agenda needs to promote growth, significantly improve productivity, and make them more appealing to investors to enable additional capital infusion.

Banks’ share of total financial assets in almost all economies has been steadily declining. The trend is accentuated in markets where many banks have unsustainable financial returns—bank valuations remaining below book value for sustained periods—and in high-growth economies where demand for production credit is rising at a rapid pace. A cross-market review of banks suggests that those with business models anchored in primary customer relationships have high valuations.

Now is the time to act and truly embrace radical change rather than incremental improvements. Currently, many banks benefit from income tailwinds due to rising rates that creates headroom for change. At the same time, many newer competitors (such as payments players, fintechs, and even big tech companies) are facing challenges—in particular, increased attention from regulators (which is expected to slow their growth) and rising scrutiny from investors (potentially complicating their access to funding for growth).

Governments will place high expectations on banks to be role models and catalysts for change on climate transition and corporate social responsibility. The climate transition will create new business opportunities for banks but will place additional pressure on profitability in the short term.

Regulators are expected to place additional capital and liquidity requirements in anticipation of higher risks. These demands will mandate significant loan-portfolio optimization and further investments in data infrastructure for tracking and reporting.

Regulators and governments across the world can embrace complementary ideas. Such cooperation can reinforce banking profitability without compromising systemic stability. They should adopt new agile approaches to rules like the test-and-learn paradigm, push for consolidation, and encourage industry utilities and digital assets, among other things.

Now What

If banks want to win competitively, they must drive toward far-higher productivity and radically reduce the cost of complexity. Starting with a digital-first delivery concept and a detailed cost-driver understanding, it is possible to design a zero-based business model that will allow a step change in productivity that is 40% higher than what is considered normal today.

Banks need to make portfolio decisions that enhance value. Banks should exit business lines or, at a minimum, reduce capital exposure to low-return asset classes and invest in new areas of strategic growth with more favorable levels of return on equity.

Banks need to design a drastically simplified business model. It must be supported by an actively managed balance sheet, a modern platform operating model, a bold deployment of front-to-back digitization, and a comprehensive re-imagination of functions leveraging AI and generative AI. 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.

Banks need to embrace the paradigm of a “digital product company” and not just a “tech company” as a foundation for a new organization model and talent framework. This paradigm 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.

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. 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.