Updated Oct 14, 2023 - Economy

What banking crisis? There's a quiet global banking boom underway

Data: McKinsey; Chart: Axios Visuals

The world's banks earned $1.3 trillion in 2022, in "the best period for global banking overall since at least 2007," per a new report from McKinsey. The estimate for 2023 profits, at $1.4 trillion, is even higher.

Why it matters: The past two years' headlines have been filled with bad news for banks. But the industry as a whole looks astonishingly healthy. Which, if nothing else, is a good reminder to always look past the headlines.

Driving the news: This year has seen the biggest bank failures since the financial crisis. Silicon Valley Bank was felled by higher interest rates; First Republic and Credit Suisse soon followed.

  • Other banks are also hurting. Bank of America is sitting on paper losses of more than $100 billion after buying low-yielding bonds it now can't afford to sell. Citigroup is trying to cut its way to growth, with no visible success to date. Goldman Sachs has given up on its core strategy of leaning into being a bank. Charge-offs across the board are rising.
  • The Chinese financial sector is looking particularly fragile.

The other side: If you're the kind of person who pays attention to quarterly earnings reports, you would know that JPMorgan on Friday reported that third-quarter revenue was up 21% and income was up 35%, thanks in part to its acquisition of First Republic.

  • Wells Fargo's revenue and income were up 20% and 57%, respectively. Even Citigroup had a pretty healthy third quarter.

Behind the news: The spike in global interest rates has broadly been great for banks, which are not passing those higher rates on to their depositors.

  • Euro zone depositors overall have seen only 47% of the increase in interest rates, with that number falling as low as 12% in Croatia. The rest has gone to banks' bottom lines, in the form of what's known as net interest margin — the ever-widening gap between how much they pay for funds and how much they lend them out at.
  • European banks have been making so much money that Spain, the Netherlands, Italy, Hungary, the Czech Republic, Lithuania, and now Ireland have all imposed windfall taxes on bank profits.
Data: ECB; Chart: Axios Visuals

The chart above shows that European banks' cost of funds, on average, is still negligible at a mere 0.31%.

  • Meanwhile, the benchmark Euro zone interest rate — the minimum risk-free return that banks can receive on their funds — has risen from 0% in mid-2022 to 4.5% now.

Where it stands: Banks in countries bordering the Indian Ocean are doing particularly well, with McKinsey noting that places like Singapore, India, Dubai, and parts of eastern Africa are "home to half of the best­-performing banks in the world."

  • India, Vietnam, Tanzania and Mozambique all have banking industries that are expected to grow at double-digit rates over the full course of this decade.

Between the lines: Banks have spent the past 15 years or so struggling not only with would-be disruptors and emboldened regulators but also with the more existential question of how it's possible to make a profit lending money in a world of zero interest rates.

  • Now that rates are rising back to pre-crisis levels, the banks are like runners who have spent years training at altitude and who now find themselves competing at sea level.

The bottom line: That which didn't kill them made them stronger.

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