Sources: McKinsey & Company
For the past several years, the performance of the global banking industry has been stable but unexciting, with moderate growth and profits. Latin America has been an exception, however, and is the fastest-growing banking market worldwide.
Between 2012 and 2017, banking revenue before cost of risk in the region grew at a compound annual growth rate of 12 percent in constant 2017 exchange rates, reaching $418 billion, according to McKinsey Global Banking Pools data. This is six percentage points higher than the global average and more than any other region.
Multiple factors contribute to this fast growth. Among them, Latin America has very low banking penetration compared to other regions. In several Latin American countries, 30 to 50 percent of the population over age 15 have an account with a financial institution, compared to more than 90 percent in countries like the US, UK, or Spain, or roughly 80 percent in China. Additionally, Latin America has a young and growing population that contributes to faster growth.
We expect Latin America to remain the growth leader in banking, and to continue closing the gap in banking penetration, with revenues increasing at around 10 percent per year over the next five years and reaching $675 billion before cost of risk (Exhibit 1).
Retail banking has been the center of growth, outperforming wholesale by two percentage points and growing at a rate of 12.6 percent between 2012 and 2017. Within retail, consumer finance has been the primary growth engine, and remains the most developed banking submarket in the region, representing more than one-third of after-risk revenues. However, in relative growth terms, microloans, deposits, and retail payments are the fastest-growing submarkets (Exhibit 2).
We expect retail and wholesale banking to grow at rates of 10.2 and 9.8 percent, respectively, through 2022, with consumer finance and mortgage as the strongest drivers of retail growth—although almost all retail banking products will thrive.
Latin America is also the global banking industry’s most profitable region. Overall return on equity (ROE) in 2017 was 14 percent, outperforming other global regions and more than doubling the 4–6 percent range of most developed regions (which for many countries implies that banks are not covering the cost of capital). Revenue is the primary factor in the region’s outperformance: interest margins over assets stood at 4.9 percent in 2017, 1.8 percentage points above the closest regions, and fee margin over assets at 1.3 percent. Latin America’s profit advantage is negatively offset, however, by its lower cost efficiency, with operating expenses at 3.9 percent of assets (1.5 percentage points higher than the next-closest region), and its poor asset quality, with provisions at 1.1 percent of assets.
National leaders (banks with total assets of more than three times their market average) are the clear winners in terms of average profitability levels, with a combined ROE of 15.2 percent. Large banks (total assets between the market average and three times the market average) and medium banks (assets of from one-quarter of the market average, up to the market average) are next at 13.6 percent and 13.1 percent ROE, respectively. The drivers of profitability are very different, however. While national leaders rely heavily on efficiency, large and medium banks rely on revenues (mostly on the margin side) and on asset quality, with a significantly lower provision ratio than national leaders and small banks.
Latin America’s small retail banks (assets less than one-quarter the market average) are the least profitable among the size groups, with average ROE of 3.9 percent, significantly below the cost of capital. This performance is driven by low return on assets (ROA) and a lower-than-average leverage ratio. ROA is significantly hurt by inefficient cost structures and asset quality.