As is the case in other parts of financial services, regulation has placed added financial burdens on banks, increasing their financial resource requirements and operating costs and threatening the economics of corporate banking. At the same time, digital competitors from the FinTech space and multi-dealer trading platforms are snapping at banks’ heels and looking for opportunities to unbundle the traditional value chain in which banks closely linked themselves with clients and investors.
Much has been written about this dual challenge of regulation and FinTech creating a doomsday scenario for corporate banks. This needn’t be the case. While there are clear threats visible across the value chain, by their nature, positioning and heritage, corporate banks holding the keys to remain the prime provider of core corporate banking services to the real economy. However, there is no reason for complacency. To remain relevant, corporate banks need to deliver excellence across the value chain – in the near term to preserve returns, while in the medium-term to protect their incumbent position from new types of competitors.
On average the sector currently returns 13% pre-tax RoE, with about 40% of banks returning 15% or above and the rest below, with low loan loss provisions in many parts of the world a major driver. This compares favorably with other segments of banking, particularly post-crisis investment banking and capital markets, but the differences in performance are wide. And while the achievable performance is strongly impacted by a bank’s home market, achieving excellence is a significant driver of returns. We see that the “spread to excellence” is worth 17 RoE-points. This can more than equalize any “location disadvantage”.
This report documents best practices across seven drivers of excellence which leading banks around the globe are implementing, and comments on the associated management challenges.
Corporate Banking Performance
Corporate Banking performance is spread widely across and within markets. To explain the difference between best and worst performing banks in one market, we have quantified the RoE impact of seven drivers of excellence:
Becoming excellent is as transformative as adopting a healthier lifestyle in that you need determination, perseverance and discipline.Thomas Schnarr, Partner
1What are the main threats to the current Corporate banking business model?
As in other parts of financial services, regulation and digitalization are shifting the goalposts. However, it is easy to ignore these changes as their impact is not felt so acutely in corporate banking as it is in other parts of the business. Disruption by new entrants is still limited to specific areas and the full economic impact of regulation is still being phased in. This is why it is so important for corporate banks not to be complacent about the current situation but rather work on their excellence – this will bolster economic performance and fortify banks privileged position in the value chain.
2How do you define excellence in this context?
When we talk about excellence in Corporate Banking, we mean the capability of a bank to deliver the best possible products and services to their clients, at the lowest possible costs and with the lowest possible risk. In order to produce this result, banks need to be extremely good at everything they do along the entire value chain of Corporate Banking.
3Are there different challenges across regions?
On a global level the challenge is clear: banks need to deliver excellence across a similar set of drivers. The context in which they can achieve this will be different not only for each region but for every regional market. Local market practice and the competitive situation in the market will determine which drivers are most important whereas a bank’s current level of excellence will determine the specific roadmap the bank has to develop.
4What is the current level of corporate banking performance?
Based on our sample, we see an average pre-tax RoE of 13%; however, behind this number lies a very wide spread across and within markets. The difference between markets is driven by market structure, regulatory reality and - importantly – the point in the credit cycle, whereas the difference between banks within a market can be explained by banks’ level of excellence. One major driver behind these benign numbers are the very low loan loss provisions in many parts of the world – clearly corporate banking returns will suffer once provisions revert to their long-term mean
5What are the drivers of excellence which leading banks around the globe should implement?
The seven drivers of excellence described in the report cover the entire value chain starting with the client interface to the products and services banks can provide as well as their execution capabilities with regards to processes and financial resource consumption. For each of them we have described best practices which leading banks in the world are implementing.