Job cuts alone won't be enough to save big banks, McKinsey says

NEW YORK (BLOOMBERG) - Firing people won't be enough to save the world's biggest banks from technological and regulatory changes that have reshaped the industry - whole businesses must go, according to McKinsey.

Almost every bank will have to quash aspirations to be all things to all customers so that they can eliminate fixed costs, the consulting company said Wednesday in a report titled "Time for Tough Choices and Bold Actions". Only three to five global full-service banks will survive, McKinsey said.

"It's really time, except for a handful of banks, to change fundamentally the business model," Roger Rudisuli, one of the authors, said in a telephone interview. "It's fair to conclude that this industry overall isn't earning an attractive return and is overall just not working."

Many banks are already rethinking their business models, as regulators force them to hold more capital and use less borrowed money. Barclays is scaling back its business in Africa and has stopped trading stocks in Asia.

Royal Bank of Scotland Group, once Europe's largest lender, has abandoned almost all foreign operations, retreating to its home market in the UK, and is getting out of most capital-markets businesses. Deutsche Bank wants to sell a German consumer bank it bought in 2010 and is cutting back bond trading. Credit Suisse Group is shifting from trading to wealth management.

While most banks are already in their second or third round of cost cuts, they're going about it wrong, according to the report. Companies need to "take out entire verticals" and reconsider whether some customers and products really need highly paid salespeople or can be traded electronically, the consultants wrote. Only banks that have at least US$15 billion to US$20 billion of combined capital-markets and investment-banking revenue have the scale to compete in every area, Rudisuli said.

"Too many banks continue to wait for salvation from revenue growth," the consultants wrote in the report. "After seven years of underperformance, the time for waiting is over." McKinsey has been making similar arguments for at least five years. Its 2011 report on the industry was called "In Search of a Sustainable Model," and in 2013 it predicted only five or six global investment banks would remain. Rudisuli said the latest report is even more pessimistic because revenues from capital markets and investment banking "have not come back at all" and structural costs have proven difficult for banks to root out.

Other recommendations in McKinsey's latest report include allocating resources to clients willing to pay for them, leveraging digital technology and addressing the risk of unethical conduct.

The cost-cutting at banks has been good for the consulting industry. Spending on consultants by banks around the world has almost doubled since 2007 to US$29 billion last year, according to research by ALM Intelligence.