It’s a multipolar world

How big is banking compared to the economy? The answer varies quite a bit, both geographically (exhibit) and over time. In many places, banking is deeply entrenched in the economy. For instance, the ratio of revenues after risk costs (RARC) to GDP in Singapore is 16.7 percent. In other words, after deducting write-downs and loss reserves, banking revenues make up more than one-seventh of Singapore’s economy. In North Africa, on the other hand, banking’s role is much smaller, at 2 percent of the economy.

March 2017

Worldwide, the range is wide—and shows some interesting differences. The ratio for developed markets is higher than for developing markets in average (5.9 percent versus 5.3 percent), but not by much. Looking more deeply, China has a higher penetration than the United States. Brazil’s ratio is higher than that of the United Kingdom. And Eastern Europe has recently outgrown Western Europe on this metric.

Banking penetration of the European Union stays at 4.9 percent, lower than the emerging-market average and 2 percent behind the United States. The deeper penetration of US banks is mainly because its risk costs are currently lower and its revenue mix is better suited to the current environment. US banks are strong in retail and asset management, while EU banks currently hold huge volumes of corporate debt. Asset management, a US strength, has been perky lately, while the role of corporate and investment banking is waning worldwide.

The ratio of RARC to GDP does not tell the whole story, of course. The drivers of banking revenue and profits are far more complex than GDP or economic development. Market structures, growth, asset mixes, and trends in margins and risk cost play critical roles. Nonetheless, the ratio does provide some useful insights for banks to consider.

Some markets offer opportunity for growth

The country with the broadest potential opportunity is Africa. As a region, it has a ratio of 3 percent. South Africa, the continent’s most advanced banking sector, is at 9.5 percent. As is well known, many African economies have low banking volumes, especially in retail and in small and medium-size enterprises. We do see some potential for financial stocks to build, especially in sub-Saharan Africa. But volatile commodity prices and other factors make investments in Africa complicated bets.

India is the largest low-penetration market. Its RARC-to-GDP ratio is 3.4 percent, and only 53 percent of its 1.25 billion people have access to banking services. Recent government reforms are spurring growth in the number of bank accounts. And once the country’s new banknotes are well established, bank use should rise further.

Some Southeast Asia countries, such as Indonesia, Malaysia, and Vietnam, are true hot spots for growth, especially given the new Association of Southeast Asian Nations “passport” regulations that allow current holders of banking licenses to enter other ASEAN markets easily.

And in the developed world, Germany’s low penetration might not be a signal for growth: its deeply fragmented market means that expanding share will be difficult. Persistently low interest rates will likely also hold back growth.

Some others might be vulnerable

High penetration rates frequently indicate a financial hub—as seen, for instance, in Hong Kong, Singapore, and Switzerland. They can also indicate a developed market that is highly consolidated (and often profitable), such as those in Australia, Canada, and even the United Kingdom. Canada’s sector is particularly robust. Its 8.9 percent ratio is due to a healthy level of balance-sheet-driven lending, strong margins, and balanced competition. Any change in these countries will likely take a long time to unfold.

But in other cases, a high ratio can be the result of strong margins, as we see in several Latin American countries. Sectors that depend on high margins might be vulnerable to two kinds of problems. First, macro shocks, such as an abrupt turn in the credit cycle, might hit many emerging markets. China, for example, generates $417 billion in revenues by lending to corporations—revenues that might drop quickly, should China’s economy come in for a “hard landing.” Second, these markets can be very attractive to digital attackers from outside the market. Fintech companies and even incumbents with a low cost-to-income ratio can readily set up healthy business models.

As banks consider market and economic implications, they might find profitable opportunities in unexpected places. The traditional emerging- and developed-market logic does not seem to hold. Understanding the complex interplay of economic growth, balance sheets, margins, and risk trends is crucial to deciding not only the best portfolio strategy but also the best approach to digital transformation—the other great to-do on most banks’ agendas.

Detailed views on the economics of banking are available by request from McKinsey Panorama Global Banking Pools. Should you want more details or have any questions, Panorama’s Helpdesk ( is happy to provide methodological and analytical assistance.