2022 Global Banking Review and the Factoring Industry

Another reflection of global investor indifference for the traditional banking sector relative to the other five sectors is that average PE (or price to earnings ratio) for the traditional banking sector in 2022 was only 13X, or just 65% of the 20X average PE for the other five banking sectors analyzed. This low valuation confirms that traditional banks relative to other banking sectors don’t appear to be able to generate sustained growth, and investors as a result discount significantly franchise values in the sector overall.

A final observation that I made from the McKinsey Annual Banking Review was that investors continue to shun traditional banks as investments and that other banking sectors (most notably fintechs and specialists) have exploded in financial value relative to traditional global banks. The total global market capitalization for the entire sector has dropped from a record $16 trillion in 2021 to only $14.5 trillion in 2022. Of this 2022 total, traditional banks now account for only 50% of the total market capitalization, as specialists and fintechs have seen their share jump from only 30% in 2017 to 50% in 2022. Perhaps one of the obvious solutions to immediately increase shareholder value for traditional global banks would be to eliminate the word “bank” from their name and accrue a leap in market capitalization overnight!

In summary and conclusion, many of the leading global factoring enterprises are either owned by or aligned with large, traditional commercial banks at the present time. This being the case, our industry must be acutely aware of the performance dynamics of all sectors of the global banking industry including not just traditional banks but also niche corporate and investment banks, asset management firms, consumer finance and other specialists, financial exchanges and payment firms.

Even though the traditional banking sector has made significant improvements in ROE recently, it lags other industry sectors in performance on a relative basis. As a result, market capitalization and PE ratios remain a fraction of other sectors and could present a foreboding challenge for traditional banks to raise additional equity capital if required in the future. The global factoring industry also needs to acknowledge that most if not all the growth in the sector (in terms of market capitalization) has come from not our “parent Banks” but our/their competition. This fact ought to make us become even more focused on finding tools (digital transformation, AI, others) to become even more focused and efficient in the way we serve our SME clients in 2023 and beyond, perhaps emulating more our non-banks peer more than ever before.