Banks are unlikely to return to a period of sustainable profitability for several years as the global financial downturn rumbles on.
That is according to a new report published by McKinsey today (9 October), which has indicated lenders still need to identify significant cost savings in order to boost their balance sheets in the near future.
The consultancy firm estimates that the cost-to-income ratio of the average European bank is around 68 per cent, but noted this figure would have to drop to 46 per cent for financiers to experience a return on equity of 12 per cent, the Daily Telegraph reports.
McKinsey went on to warn that investors could become "unwilling to commit significantly more capital" if lenders continue to earn returns below their cost of equity.
"As a result, lending capacity will grow more slowly than demand and result in structural re-pricing," it warned.
Toos Daruvala, a director at the organization and an author of the report, told Reuters that many smaller banks will consider merging over the next five years or so.
By Tony Aynsley