I needed a simple, easy to read transition words poster for my students, so I made this one! This poster will help your students meet Common Core standards by helping them use these temporal words and phrases to signal event order.You can print as large as 11×17 for a classroom poster or go smaller. I use a letter-size poster for my students to have in their writing folders and for me to use on my document camera. Check out my store for opinion and informational writing transition words, sente
Here is a great visual poster for students when learning how to use transition words in their writing. I made copies for each of my students to house in their writing folders and also printed one out poster size for our writing bulletin board. Also, it is ELL friendly :)Enjoy!
TRAFFIC LIGHT TRANSITION WORDS
Transition Word Cards- 24 Color Coded Words to Post In Your Writing Center
Help your students use transition words in their writing with these color coded cards. Green for words to use in the beginning, yellow for in the middle and red for the end. Also included is a 8.5 x 11 traffic light poster with the corresponding green, yellow and red colors as a visual for the students to refer to. These are perfect to post in your writing center or as part of your focus wall or writing bulletin board.
Introduce or review transition words with this interactive foldable. Transition words are an important tool for organizing writing, but can be challenging for our young writers. This foldable uses the comparison to green, yellow, and red traffic lights to the different types of transitions. Plus, it includes a writing sample, a Christmas themed passage, that demonstrates the usage of transition words. Enjoy! Please provide feedback, thank you. If you have any questions please send an email to li
Click the preview to view all of transitions and transitional phrases for this product. Fun and colorful posters to teach a variety of different ways to cite/quote text evidence, as well as basic traffic light transitions. Post these around the room to help students reference new ways to include details.
A printable handout or poster of transition words to help students create better flow in their narrative writing and enhance sequence of events.
This is a traffic light transition words anchor chart. This will help students with transitions in their writing.
2 copies. One is not in the typical order. Most teachers will put the green up top because those are for the starting paragraph.
I can’t have the light out of order so I made both.
This printable poster is perfect for introducing signal words to students in writing. It can be used in whole or small group. It is a great tool for teacher -student writing conferences! The green light words signal for the reader to continue, the yellow light words signal the reader to slow down , and the red light words signal the reader to stop (the end of the writing piece).
This traffic light transition word chart is helpful for all students! Simply print and distribute to your students!
Using a Traffic Light, we can easily teach transition words in Spanish. You will find a presentation, and activities that can be graded.
Traffic light transition words! One set in color and one set in B&W for printing purposes included in this set. Includes: **One slide per color transition green, yellow and red. **One note taking paper/graphic organizer where students can list the transitions and complete one example next to it. **A clearer graphic organizer with pictures that match the cake baking fill in the blank example. **An alternative graphic organizer with more space for transition words to be recorded for each color
Are your students struggling trying to find transition words to use in their writing? Help your students transition from one idea to the next by posting this Transition St. up on your classroom wall! Cute & fun way to display some transition words!_________________________________________________________________FILE INCLUDES:*Black and White traffic signals*Green, Yellow, Red traffic signals*Transition St. street sign(Black background not included–You may use black butcher paper or black co
Your students will love using this road map and traffic stoplight for writing a proper paragraph.Included in this resource is everything you need to visually encourage your students to write a paragraph using proper paragraph structure.Included:2 Bulletin Board Titles:“Proper Paragraph Structure” (road sign lettering)“On the Road to a Proper Paragraph” road sentence stripTime Order Word Cars:8 ½ by 11 sized cars (6 transition words)1 LARGE Wavy Road Map including Topic and Closing Sentence stree
This Beginning, Middle, End story retelling graphic organizer comes with a traffic light transition words poster. The signal words are helpful to students so that they recognize story elements and summarizing events happening in order. The green, yellow and red colors serve as a great visual / work nicely with color coding events.Students can summarize any fictional story by retelling important elements from the beginning, middle, and end. Students improve their reading comprehension skills whil
Teach your writers about transition words with the help of this traffic light printable!
Green light: GO! transition words for starting your writing
Yellow light: transition words for the middle of your writing
Red light: STOP! transition words to wrap up your writing
This scaffold or support is perfect to help learners remember what transition words to include in what part of their writing. Helps eliminate confusion during writing about what transition words go before the first detail, additional details, and concluding details. Great resource to have students keep in their writing folders, post in your classroom for students to reference, or make smaller copies to have students keep on their desk or in their pencil cases.
This listing is for a cute and colorful card set, that is designed to help children to successfully transition from one activity to the next. Each card comes with a word and picture that supports any verbal instructions a teacher might be giving. These cards are great for all children, especially pre schoolers, who are reluctant to finish up when they’re enjoying themselves, but are essential for children on the Autism Spectrum, as they provide a visual reference and time to prepare for change.
The air fryer is a great new way of cooking made easy and fast, with little to no oil. Air fryer baskets are generally coated with non-stick material to make clean up a breeze. So, is there a need to line it with air fryer parchment paper?
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Makes clean up easy
Another benefit of using parchment paper in air fryer is that it makes clean up easier. This is because there is no food stuck in the holes so no scrubbing is required. All you need to do is throw the parchment paper away after cooking, and give the basket a light clean!
Keeps the air fryer basket in good condition for longer
Parchment paper prevents oil and grease build-up on the basket of an air fryer, therefore preventing foods from sticking to the basket. Which means there will be less deep cleaning required. In the long run, this will prevent the deterioration of the non-stick coating.
By lining your air fryer there is a distinct benefit of keeping it in a good condition but can other alternatives be used? Let’s go through the different types of liners we have on the market.
Types of common kitchen liners
Parchment paper is made from paper that has been treated with silicone making it an excellent non-stick surface. It is heat resistant up to 450 degrees Fahrenheit (232 degrees Celsius) making parchment paper safe to use in the air fryer. This is because most air fryers have a max temperature of 450 degrees Fahrenheit (232 degrees Celsius).
Perforated parchment paper has holes in it to allow the excessive fat drip away from your food that you are frying, roasting or baking. This particular type of parchment paper is especially useful if you want to lower the amount of oil in your food without affecting the taste and texture. The perforated nature of this paper can also help with air circulation so that your food cooks evenly and thoroughly too! Therefore, using parchment paper in the air fryer is ideal.
Baking paper and parchment paper is the same paper, they are just named differently internationally. Hence, baking paper is safe to be used in the air fryer however, it would be best to get perforated ones which has holes to assist with the air circulation.
Silicone air fryer liner
Silicone air fryer liners are great alternatives to parchment paper. These liners are made from silicone which is non-stick that prevents food from sticking to it. They are heat resistant and are re-usable.
The silicone liners made especially for the air fryer has holes in them to allow air circulation during cooking.
Using silicone air fryer liners are easy to clean. You can either hand wash or put them into the dishwasher, although it is advisable not to use any metal scrubbers to avoid damaging the silicone material.
This is another alternative for lining your air fryer basket. Aluminum is safe to use in the air fryer as it is not heated up too rapidly and the aluminum can handle the heat. For tips on how to use aluminum safely in the air fryer refer to our blog “How to use aluminum foil in an air fryer”.
This type of paper is NOT heat resistant as it is made of soybean or paraffin wax coatings. Therefore, it is not safe to be used in the air fryer as exposure to high temperatures would cause the wax paper to melt. Wax paper is only meant for wrapping food for storage.
How to use air fryer parchment paper
Pre-heat without parchment paper: Do not pre-heat your air fryer with the parchment paper. When the air fryer is on, the strong fan circulates the air around so the light parchment paper will be blown around. If it touches the heating element it may catch alight.
Put weight on the parchment paper: The air fryer fan is strong to circulate the heat therefore make sure that the food is heavy enough to weigh down the parchment paper. This will prevent it from flying or flapping around in the air fryer.
Quality of parchment paper: Make sure to use parchment paper that is approved by the FDA. Also, make sure that the parchment paper can withstand the max temperature of your air fryer.
Prolonged cooking at high temperatures: Avoid cooking for long periods at high temperatures when using parchment paper. This is because when the food is placed on top of the parchment paper, it will not be entirely covered in most cases. So, the areas where there is no parchment paper will crinkle up and darken. If it is too close to the heating element, this may burn the parchment paper if the paper cannot handle the heat anymore.
Parchment paper is optional for air fryers and is not necessary. However, it is a great tool to help keep your air fryer in a good condition for longer.
It is safe to use in the air fryer because it is heat resistant. But there are some things to note when using the parchment paper in the air fryer to make sure your kitchen is safe.
They assist with fat dripping away from your food and allows even cooking of the food by having holes for heat circulation. Also, using parchment paper makes clean up even easier as all you would need to do is throw the parchment paper away and wash the basket without scrubbing.
Hence, it is definitely worth it to use this method to help prevent damage to the air fryer basket over time. This will save you from having to get a replacement basket for the air fryer.
First the pandemic, and now inflation, war, rising interest rates, supply chain disruption, and more: for banks globally, the combination of macroeconomic volatility and geopolitical disruption in 2022 overturned many assumptions and ended more than a decade of relative stability. One thing didn’t change, however: valuations. Banks overall continue to trade at a steep discount to other sectors, a reflection of the fact—confirmed once again in 2022—that more than half of the world’s banks earn less than their cost of equity.
In this year’s Global Banking Annual Review, we take a closer look at the roller-coaster ride banks have been on over the past months, the growing divergence between banks with different profiles in different countries, and the factors that make the best performers stand out.
At a time of growing corporate and government commitments to reduce greenhouse-gas emissions, we also shine a spotlight on sustainable finance, a much-discussed theme in banking. Despite lingering skepticism and concerns about greenwashing, we find strong evidence suggesting that climate-related financing is entering a “next era,” as the initial surge of funding for renewable energies gives way to a deeper engagement with banking clients across all sectors.
For banks, 2022 has been a tumultuous year of shocks and growing uncertainty
Banks rebounded from the pandemic with strong revenue growth, but the context has changed dramatically. Now a series of interrelated shocks—some geopolitical and others lingering economic and social effects of the pandemic—are exacerbating fragilities.
Bank profitability reached a 14-year high in 2022, with expected return on equity between 11.5 and 12.5 percent (Exhibit 1). Revenue globally grew by $345 billion. This growth was propelled by a sharp increase in net margins, as interest rates rose after languishing for years on their cyclical floors. For now, the banking system globally is sitting comfortably on Tier 1 capital ratios between 14 and 15 percent—the highest ever.
The improvement in margins accounted for 60 percent of the revenue gains (Exhibit 2). Almost all segments of banking have seen improvements—capital markets and investment banking being the exception.
Nonetheless, more than half the world’s banks in 2022 continue to have a return on equity that is below the cost of equity. For the second half of 2022, our analysis suggests that margin increases delivered returns above the cost of equity for just 35 percent of banks globally. And less than 15 percent of banks are earning more than 4 percent of their respective cost of equity.
Lingering effects of COVID-19 and geopolitical tensions are roiling the financial sector
The longtail effects of the COVID-19 pandemic are still being felt, and the Russian invasion of Ukraine in February 2022 and heightened tensions over Taiwan marked the rude return of geopolitics as a disruptive force. Five resulting shocks are affecting banks globally:
- Macroeconomic shock. Soaring inflation and the likelihood of recession are sorely testing central banks, even as they seek to rein in their quantitative-easing policies.
- Asset value shock. These include steep declines in the Chinese property market and the sharp devaluation of fintechs and cryptocurrencies, including the bankruptcy of some high-profile crypto organizations.
- Energy and food supply shock. Disruptions to the energy and food supply, related to the war in Ukraine, are contributing to inflation and putting millions of livelihoods at risk.
- Supply chain shock. The disruption of supply chains that began during the first pandemic lockdowns continues to affect global markets.
- Talent shock. Employment underwent major shifts during COVID-19 as people changed jobs, began working remotely, or left the workforce altogether to join the “great attrition”—shifts with no sign of easing.
The consequences differ across and within regions, notably in emerging markets
One of the striking characteristics of this period is that some banks in some geographies are growing robustly and posting buoyant and rising profits and revenues. This far more upbeat picture is to be found in select markets—many regional banks in the United States and top five banks in Canada, for example. In emerging economies such as India, Indonesia, Mexico, and South Africa, the largest banks by market capitalization are performing very well.
This is not the old story about emerging markets versus advanced economies. Indeed, this year it’s possible to make the case that, in banking at least, the whole notion of “emerging markets” is dead (Exhibit 3). The group of countries to which it refers is no longer monolithic: some of the best-performing and high-growth banks are to be found in Asia, as are some of the worst-performing and lowest-growth ones.
As the economy slows, the divergence between banks will widen further
The current uncertain macroeconomic outlook will affect banks in two ways, albeit to different degrees. First, there is likely to be a continuing boost to profitability from higher margins as interest rates increase—but this may prove transitory. Second, banks face a long-term growth slowdown. The result of these pressures will be an increase in the “great divergence” trend among banks that we noted last year, with outcomes varying considerably, depending on funding profile, geography, and operating model.
How bad (or good) might it be for banks?
We modeled the effects on banks of two possible macroeconomic scenarios: inflationary growth and stagflation. In either scenario, we expect the initial stage to be positive for banks. Rising interest rates will lift net interest as short-term lending products such as consumer finance are repriced faster than liabilities. Global banking revenues are likely to see an increase of 5 to 6 percent in 2022.
In this phase, both scenarios forecast that costs and risks remain under control. Global banking return on equity would rise to approximately 12 percent in 2022, two percentage points more than in 2021.
The divergence story will continue to play out through these scenarios. Banks in Asia–Pacific may gain from a stronger macroeconomic outlook, whereas European banks may see the full effects of the scenario sooner and with more detrimental impact. In the event of a long recession, we estimate that return on equity globally could fall to 7 percent by 2026—and below 6 percent for European banks.
The net impact will likely be a further concentration of growth in emerging Asia, China, Latin America, and the United States. We expect that these regions will account for about 80 percent of the estimated $1.3 trillion in global banking revenue growth between 2021 and 2025.
Banks trading at a growing discount to other sectors
Banking as a sector is valued substantially below other industries, a reflection of the stark legacy challenges that traditional banks face. About half of all banks are net destroyers of value, and many of the others are weighed down by prospects of slow growth and low expectations for profitability.
The gap in valuation between traditional banks and fintechs remains large, even if the 2022 downturn in crypto and buy now, pay later brought fintechs down from their highs.
Between banking and other sectors, only about half of the valuation gap is a reflection of the banking industry’s low profitability (Exhibit 4). The other half reflects the expected lack of future growth, demonstrated by banks’ low price-to-earnings ratios (P/Es). Banks have P/Es of about 13, compared with an average of 20 for other sectors.
Within this overall gloomy picture are brighter spots. Globally, about 15 percent of banks qualify as “North Stars.” They have high P/Es, implying high expectations for long-term growth, and high price-to-book ratios (P/Bs) that reflect risk-adjusted short-term profitability. Their valuations are two to five times higher than those of other banks. Most of these banks are specialists with a focused business model. They are more geographically diverse, with concentrations for certain sectors; for example, North American payments providers and consumer finance and other specialists from emerging Asia demonstrate both high growth and high profitability.
In our banking review last year, we identified about half of banks as value destroyers. This year, by looking not just at profitability but also at growth, we find that in addition to this 50 percent, which are destroying value now and are expected to continue doing so in the future, another 35 percent are currently creating value but are not able to grow sufficiently to ensure they will continue doing so. These are banks with high P/Bs but low P/Es. In other words, they are profitable now, but the longer-term expectations for future growth are not bright.
Banks’ performance varies by geography, specialization, customer segmentation, and scale
To understand why and how banks end up where they do, we looked at them across four dimensions: geography, specialization, customer segmentation, and scale.
Last year, many banks in Europe were already unprofitable; only 25 percent of the 300 largest European banks were valued above book in 2021. In the months ahead, they face intensified pressure from a potential recession. By contrast, about 25 percent of emerging Asia banks are valued at 1.5 times their book value or above, in part because of fast-growing economies and their innovative practices. P/B and return on equity are also strong in the Middle East, Latin America, and North America.
Specializing can be profitable. Well-valued specialist players and fintechs are—not surprisingly—active in banking products that generate profits, including deposits, payments, and consumer finance. The result is a two-speed system in which traditional banks are left behind (Exhibit 5). Overall, the banking system destroyed about $120 billion in economic value in 2021, with a return on equity that failed to match its cost of capital. But the divergences were very large across areas of banking specialization.
Take a fresh look at customer segments and demographics. Our analysis suggests that, in retail banking, disproportionate revenues tend to be locked in specific segments. One notable feature of this analysis is the gap between the demographic distribution of the population and the age at which they generate banking revenue. For example, in the United States, banking revenue peaks among people between the ages of 60 and 70, which is about 40 years after the demographic peak. In China, the trend is reversed: the revenue peak arrives 20 years before the demographic peak.
Managing the present while preparing for the future
Over the next five to ten years, market pressures and shifts, including technological changes that disrupt traditional banking, will amount to fundamental structural breaks. Banks will need to improve their short-term resilience and invest in the long term to innovate and prepare the path for future profitability, increased growth, and higher valuations.
In the near term, four strategic objectives can help bolster resilience:
- Financial resilience. The best-performing banks will have a net income structure with low sensitivity to interest rates and risk costs, and they should target a cost-to-income ratio of 35 to 40 percent.
- Operational resilience. That means reducing or eliminating a presence in high-risk countries and building exceptional risk management practices.
- Digital and technological resilience. Cyberattacks remain a serious risk, and the best banks have a well-protected and future-proof technology infrastructure, as well as superior data security.
- Organizational resilience. Banks that perform best will have rapid reaction times and invest in attracting, reskilling, and retaining the best talent.
For the longer term, banks will need to move from traditional business models to more future-proof platforms, potentially decoupling business units such as everyday banking and complex financing or advisory services. Banks could consider several approaches. For example, they could foster highly differentiated customer relationships, with a strong focus on establishing a deep emotional connection. They also could develop proprietary data and insights on sets of customers, including with the use of advanced analytics. A third option would be to make substantial and clear bets when allocating resources and capital. Fourth, banks could create new customer access and revenue sources, such as subscription fees, payments fees, and distribution fees, that do not involve the balance sheet. And banks could focus on innovation, with the goal of instilling a truly entrepreneurial culture and attracting and retaining the talent needed to contribute within such a culture. Finally, as we describe in the next section, banks could develop a strategy for targeting environmental transformations.
Issuance of sustainable debt instruments, which was close to zero five years ago, has seen substantial year-on-year growth through 2021. The volume of sustainable bonds, including green bonds, sustainability bonds, social bonds, and sustainability-linked bonds, reached $965 billion, up by 80 percent from 2020. The volume of sustainable syndicated loans, including green loans and sustainability-linked loans, totaled $683 billion in 2021, up by more than 200 percent from 2020. Sustainable financing activities related to the capital markets—including M&A, equities, and carbon trading—have also expanded over the past few years.
The momentum slowed in 2022 amid the broader market declines, but sustainable debt capital markets and lending fared better than the debt market overall. Issuance of sustainable bonds currently accounts for about 12 percent of total bond market volume, while sustainability-related syndicated loans are about 13 percent of the volume for global syndicated loans.
As sustainable instruments gain acceptance, scrutiny of how they are labeled also increases. In particular, sustainability-linked loans and bonds need to establish their credibility. More broadly, there is a need to disaggregate ESG categories in order to distinguish climate finance and track it separately.
Green bonds initially dominated the sustainable debt market, but they have been overtaken by sustainability-linked loans. These are performance-based instruments that tie interest rates to the achievement of defined sustainability targets. Challenges remain in setting goals, including incentives for meeting the targets set and penalties for failing to do so.
Clean-energy finance reached record highs in 2021, then slowed
In 2021, the volume of clean-energy project finance rose to record highs of $164 billion, of which $77 billion came from solar projects alone. But in the first half of 2022, banks saw a 38 percent decline in the volume of clean-energy project finance, largely because of declines in solar and wind projects. However, sustained growth in clean-energy project finance is expected to close the gap between current renewable generation and the amount needed for the energy transition.
Financing for clean energy is also becoming more competitive as a diverse and well-capitalized set of players pile into the market. Private-equity firms invested $76 billion in renewable energy, sustainable mobility, and carbon technologies in 2021, more than doubling investments since 2017. Venture capital firms nearly quadrupled investments in the same technologies during the same period.
As transition technologies like solar and wind mature, developers are refining how they bid to account for different risks and durations of contracts. Banks must change as a result: they are lending for shorter periods, aggregating project portfolios to increase ticket size, and playing a structuring role to earn incremental fees. Banks are also beginning to explore emerging technologies such as hydrogen and storage.
Entering a new era
In this next era of transition, we will see continued focus on capital deployment for sustained growth in low-emission power generation, along with many new aspects of the global energy transition being pushed as priorities that require financing. These new initiatives include growth in electrification, the build-out of energy transmission and distribution infrastructure (including grid-scale storage), emission reductions in high-emission and energy-intensive sectors such as steel and cement, and natural climate solutions.
Signs of this next era are already visible. Along with continued investments in power generation, they include increased funding for emerging technologies such as hydrogen and grid storage and bank innovations aimed at financing the low-carbon transition. Leading global banks and smaller local banks alike are developing new products, platforms, and in some cases, separate financing entities across sectors.
Growth has been fueled by policy shifts, new technologies, and growing corporate momentum. As a result, banks are maturing from a simple understanding of the baseline to exploring with clients the levers to finance reduced emissions in the real economy.
Technological innovation is enabling lower costs and increased readiness. As an example, the costs of lithium-ion batteries have dropped by 97 percent since 1991, giving a boost to adoption of electric vehicles (EVs). EV loan volumes for banks have already quadrupled since 2017 and are expected to grow 24 percent annually to more than $800 billion through 2030, according to estimates from the McKinsey Center for Future Mobility.
Companies move from commitments to action to accelerate decarbonization. Some companies are funding pilots and projects initially through their own balance sheet, but many are looking to lenders and the capital markets to fund bigger operational and strategic initiatives. For example, the Swedish steel company H2 Green Steel recently announced support from European financial institutions for €3.5 billion of debt and equity financing for a sustained hydrogen-powered “green” steel plant in Sweden.
Regulators are focusing on climate and sustainability. Disclosure-focused regulations and standards will increase rigor and transparency for climate finance and create more potential for banks to identify financing opportunities. For example, in March 2022, the International Sustainability Standards Board (ISSB) circulated draft global climate-related and sustainability-related disclosure standards. The European Union and United Kingdom have also introduced new reporting requirements.
A large untapped value pool for banks
Funding needs for a net-zero transition could exceed $4.4 trillion annually through 2030, according to McKinsey estimates. Banks are on the front line to provide financing and advisory support for a wide range of opportunities. Clean-power investment, for example, will need to be at three times 2020 levels by 2030, while investment in the electrification of road mobility will need to increase to ten times 2020 levels by 2030.
Based on this McKinsey model, we estimate that commercial financial institutions have an annual direct financing opportunity of about $820 billion. Beyond that, banks could facilitate an additional $1.5 trillion of investments for corporates between 2021 and 2030.
The revenue potential for banks from debt investment in climate finance will average roughly $100 billion annually through 2030, we estimate. This represents approximately 5 percent of total global banking revenue pools (Exhibit 7).
Navigating climate finance’s next era
Banks interested in the potential of financing the transition to clean energy should be well informed about the challenges they must overcome. They also could study early successes to draw up a road map based on their own strengths and objectives.
Weighing the challenges
Several challenges will be significant in this next era:
- Project economics. Long payback periods for certain technologies may increase risk and diminish returns, while the front-loaded capital required for the transition across sectors may discourage lenders from committing capital.
- Market conditions. Margins have been contracting for some bankable technologies, including utility-scale solar.
- Scalability. Many green projects depend on permits, supporting infrastructure, and supply chains, all of which can delay scaling.
- Standardization and disclosure. For now, there are no established standards for sustainability-related financial products or performance metrics.
- Reputational risk. Brown-to-green financing may create reputational concerns, given the profiles of clients, including fossil-fuel companies.
Forging a path
Banks will need a nimble approach to assessing a rapidly changing market for sustainable finance. The experiences vary by type of institution.
Corporate and investment banks have made the most progress, but many opportunities remain. To build on the progress made in renewable energy over the past decade, banks could scale financing capabilities to close the gap for solar, wind, and hydro while simultaneously developing capabilities for new clean energy, such as green hydrogen. They can capture transition financing opportunities with the existing client base and expand capabilities for advisory to support clients.
Commercial and small-business banking. Where clients are retrofitting buildings and shifting their energy mix, banks can provide equipment finance for energy-efficiency measures or financing for retrofits. They can also finance vehicle fleets as companies transition to electric and fuel-cell vehicles.
Retail banks can provide financing solutions for retrofitting, home appliances, and rooftop solar panels. They also can capture the sizable opportunity in auto finance from EV adoption.
Wealth and asset management can develop thematic investment options with targeted climate-forward investment theses to meet the demand from institutional and retail investors. Institutions and retail investors alike are increasingly shifting their focus from general ESG themes to the low-carbon transition.
Even before this year’s macroeconomic volatility and geopolitical disruption ended more than a decade of relative stability, bank valuations were trading at a steep discount to other sectors. That pattern continues in 2022—unsurprisingly, given that a majority of the world’s banks earn less than their cost of equity.
The overall patterns mask the success of groups of banks in geographies such as the United States, Canada, India, Indonesia, and Mexico. Studying these banks can suggest insights about the conditions associated with high performance.
In addition, banks are looking beyond short-term profitability. Most notably, evidence suggests that the initial surge of funding for renewable energies has opened a door to deeper engagement with banking clients across sectors.
For best viewing, download an optimized version of Global Banking Annual Review 2022: Banking on a sustainable path, the full report on which this article is based (PDF–1.87 MB).
ABOUT THE AUTHORS
Miklos Dietz is a senior partner in McKinsey’s Vancouver office, Attila Kincses is an associate partner in the Budapest office, Archana Seshadrinathan is an associate partner in the Singapore office, and Dee Yang is a partner in the New York office.
TABLE OF CONTENTS
As we approach the end of the second year of a worldwide pandemic, the global economy has surprised to the upside, and banks have escaped the worst. But the outlook for the industry remains clouded with half of banks not covering their cost of equity.
Unlike the previous economic crisis, this time banks did not witness any abnormal losses, material capital calls, or “white knight” acquisitions. In fact, bank profitability held up better than most analysts expected. ROE in 2020 was 6.7 percent—less than the cost of equity but still a better showing than expected and above the 4.9 percent observed in 2008 in the aftermath of the financial crisis. (A PDF of the full 2021 McKinsey Global Banking Annual Review, with more detailed data, and a set of strategic questions for banks, is available for download on this page.)
But if the pandemic has not had the expected harmful financial effects on the global banking industry, it has certainly had plenty of others. Digital banking accelerated, cash use fell, savings expanded, remote became a way of working, and environment and sustainability are now top of mind for customers and regulators.
The challenges facing a capital-intensive industry in a low-price environment also show up in valuations. Banks are trading at about 1.0 times book value, versus 3.0 times for all other industries and 1.3 times for financial institutions excluding banks, with 47 percent of banks trading for less than the equity on their books. And these undervaluations persist even after a period in which the financial system as a whole gained about $1.9 trillion (more than 20 percent) in market cap from February 2020 to October 2021.
Banking valuations suggest that capital markets are discounting an industry whose baseline for profitability and growth is decent and resilient but not attractive—and that is undergoing disruption from financial-services specialists with limited reliance on the balance sheet. This is reflected in the market multiples, where banking is currently valued more in line with an average utility, with a price-to-earnings ratio (P/E) of 15 times, than with a specialized financial services provider, where P/Es are 20 to 30 times.
Decent but not attractive
Taking into account the likely macroeconomic and pandemic scenarios and factoring in the highly varied starting position of banks worldwide, we see the global industry set for a recovery that could put ROE at between 7 and 12 percent by 2025—which is somewhat aligned with what happened in the last decade (2010–20), when the average ROE was 7 to 8 percent.
This baseline is nuanced by region and will be shaped by three macro and interconnected factors beyond banks’ control: inflation and ultimately interest rates, government support for the recovery, and liquidity. These variables will determine whether the industry will operate in the upper (12 percent) or lower (7 percent) range of profitability.
If stars align, ROE in its upper range would compare favorably with the levels achieved in 2017–19. But that’s still far from being attractive to investors, who have many rapidly growing, more profitable opportunities to consider.
From convergent resilience to divergent growth
If we are fortunate with regard to COVID-19, 2022 will be about navigating the aftermath of a crisis. Declaring an end to COVID-19 is, of course, premature, and perhaps not the right way to think about it. Today, many countries do seem to be on a path back to a form of normalcy, thanks to effective government support and the success of many vaccines. However, some regions are confronting third and fourth waves of the disease, many of them triggered by the Delta variant, and by struggles with vaccination rates. In late November, the World Health Organization designated a new variant of concern: Omicron. As we publish this report, it is too early to say how effective current vaccines will be against the new variant. However, the emergence of a new variant underscores a simple fact: In an interconnected world, none of us are safe until we’re all safe.
Our expectation however, is that the coming five years or so will mark the beginning of a new era in global banking, in which the industry will move from a decade of convergent resilience (2011–20) to a period of divergent growth (2022–27).
This convergent resilience was an outcome of necessary actions taken by banks, especially in the early years. But as banks moved in lockstep, their offerings became commoditized, and customer expectations skyrocketed. In a low-interest-rate world, a commoditized business model based on the balance sheet yields less income and brings no differentiation to the customer. If we split revenues between those generated by the balance sheet and those that come from origination and sales (for example, mutual funds distribution, payments, consumer finance), the trend is clear: growth and profitability are shifting to the latter category, which has an ROE of 20 percent—five times higher than the 4 percent for balance-sheet-driven business—and now contributes more than half of banks’ revenues (Exhibit 3).
Capital markets are already factoring in this growing divergence. In 2020, the premium from top to bottom performers widened to 470 percent (8.5 times market to book versus 1.5 times). In October 2021, this gap widened further to 518 percent (Exhibit 4). This divergence is more evident if we separate traditional banks, which are more reliant on balance sheet business, from the specialists and platform companies, which are more focused on origination and sales. The reason is that banks are valued similarly to utilities (that is, with low valuations and a narrow though widening gap between top and bottom performers), while specialists and platform companies are valued more like tech companies in other industries, with high valuations and wide gaps (Exhibit 5).
Sources of divergence
In 2010, a bank’s core geographic market accounted for 73 percent of the standard deviation in price to book (P/B). For the first half of the preceding decade, emerging economies had been the global growth engine; logically, banks that focused on serving these regions could count on that growth to boost investors’ confidence in their strategy.
Then, five years ago, there was an inflection point: growth returned to the developed world after the financial and European sovereign-debt crises, and the contributors to value were reversed. In 2017, the region a bank operated in accounted for only 41 percent of its P/B standard deviation.
Banks with the good fortune to have sizable and fast-growing economies as their core market will naturally benefit. Others will have to work harder to achieve similar results. Investors are already pricing in some of these geographic distinctions.
Larger banks are generally more cost-efficient, although the magnitude of the difference varies. In Sweden, Denmark, Germany, or Russia, the top three banks by assets are noticeably more efficient than the bottom 20 percent, with a cost-to-assets gap of 200 to 300 basis points. In the United States or China, the difference is lower—less than a 50-point gap.
We expect scale to matter even more as banks compete on technology. One reason for its importance continues to be that most IT investments tend to involve a fixed cost that makes them cheaper over a higher asset or revenue base. The initial impact of scale is this ability to bring marginal costs down as an organization gains operating leverage with consistent increase in size. But we expect greater benefits than cost cutting as digital scale begins to deliver the network effects of mass platforms offering peer-to-peer payments and lending, among other applications.
Another contributor to the great divergence is differences in banks’ capabilities to serve the fastest-growing and more profitable customer segments. Consider what’s happening in US retail banking. Over the past 15 years, the revenues from middle- and low-income households have shrunk considerably. According to our proprietary data, an average US household generates roughly $2,700 in banking revenues annually after risk costs, while a self-employed customer between the ages of 35 and 55 with a bachelor’s degree and an annual income above $100,000 generates four times more ($11,500).
The divergence in segment profitability is growing, and not only in retail banking. Small and medium-size enterprises (SMEs) represent one-fifth (about $850 billion) of annual global banking revenues, a figure that is expected to grow by 7 to 10 percent annually over the next five years. However, the profits of banks in this segment vary significantly, partly because of highly varied credit quality in the portfolio. Finding the optimal balance between providing a great customer experience and managing the cost to serve has also proven to be difficult. As a result, many banks have not prioritized SMEs—forsaking the vast potential value and leaving many SMEs feeling that their needs are ignored.