(Bloomberg) -- Banks globally reaped a $280 billion profit boost in 2022 thanks to rising rates, in the sector’s best performance since the 2008 global financial crisis, McKinsey & Co. said. 

An unprecedented series of interest-rate increases by monetary authorities across the world has provided the biggest tailwind for the global banking industry in over a decade. The bonanza has prompted several lenders to announce billions of dollars in share buybacks. 

Though the return on equity jumped to 12% in 2022 from an average 9% since 2010, McKinsey struck a note of caution in its Global Banking Annual Review.

“A return to ultralow spreads seems unlikely in the short term, but the outlook for net margins remains uncertain,” the New York-based consultancy said.  

Banks also face rising competition with transactions increasingly moving to non-traditional institutions that are less regulated than lenders, it said in the report.

Between 2015 and 2022, more than 70% of the net increase in financial funds was held by insurance and pension funds, sovereign wealth funds, private capital and alternative investments rather than banks. 

“While the growth of assets under management outside of banks’ balance sheets is not new, our analysis suggests that the traditional core of the banking sector — the balance sheet — now finds itself at a tipping point,” McKinsey said in the report.

As that trend continues, governments are broadening scrutiny of non-traditional financial institutions as the macroeconomic system comes under stress, the firm said.  

There’s also a divergence in performance, the report said. Financial institutions in the region around the Indian Ocean — including in Singapore, India, Dubai and parts of eastern Africa — are home to half of the best performing banks in the world, while in Europe and the US as well as China and Russia, banks have struggled to generate their cost of capital. 

Valuations of banks at 0.9 times price-to-book remain unchanged since the global financial crisis, with a “historic gap” to the rest of the economy, the report said. That reflects the challenges the sector faces, and potential upside, it said. 

But Chinese banks, with major ones trading at 0.5 times book value, are facing tougher times and have “limited prospects” of achieving higher returns, according to McKinsey. 

Artificial intelligence could be a “game changer,” helping cut operational costs by between $200 billion and $300 billion, according to the consultancy’s estimates. 

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