According to a report from the Boston Consulting Group, if global banks take significant action to encourage growth and increase productivity, they might increase their valuations by a total of $7 trillion over the course of the next five years.

The consultant stated that if lenders pursued growth and better price-to-book ratios in spite of challenges, their present valuations may almost treble.

“The largest driver of pessimism about the banking sector has been the significant drop in profitability,” BGC said.

In 2022, price-to-book ratios for over 75% of bank stocks were less than 1, and price-to-earnings multiples were nearly half of what they were in 2008. Since the crisis, bank stock shareholder returns have fallen short of key market index returns, and this difference is getting bigger.

BCG predicted that increasing capital requirements and more competition from emerging firms like fintechs will continue to put pressure on bank earnings, even if they invest in productivity and drastically streamline their operations.

“Banks are not likely to return to the profitability levels and valuations that existed prior to the global financial crisis,” the consultant said.

(Adapted from USNews.com)

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