Four Priorities for Corporate Banks in 2020: Navigating Choppy Seas

This article first appeared as a blog on LinkedIn

As most of the northern hemisphere departs for well-deserved summer breaks after an extraordinarily challenging first half, corporate and transaction banking leaders will be reflecting on what is to come in the second half and how they re-boot their strategies. In this short note, I share perspectives on the top priorities for corporate banking leaders in H2 2020.

The first half of 2020 has been the perfect storm. Corporate banking has gone from being the growth engine of wholesale banking to being on the front line of the crisis. Provisions have spiked to the highest levels in a decade (~14x pre-crisis levels); net interest income (NII) has collapsed as central banks cut policy rates to near zero or negative (transaction banking revenues -8% YoY); and banks have had to manage the operational challenge of meeting the extraordinary demand from corporates and SME for emergency credit (often via government schemes). While banks have done well to support their clients through the crisis (which should pay dividends in future), the economic impact on corporate banking has been real.

At the same time, the competitive threat of disruption from new entrants and expansive incumbents has not gone away (though the neo-bank threat has somewhat subsided as their own business models are challenged).

Our outlook for full year 2020 is for overall revenues for corporate and transaction banking to be down around 10%, as net interest margin (NIM) remains compressed, loan volumes subside, and GDP recovery remains patchy. Net profit and return on equity will be negative for many, driven by high levels of impairments. The outcome is highly sensitive to the trajectory of the pandemic (whether a second wave peaks or remains localized; when a vaccine can be deployed at scale) and the effectiveness of government action (whether government lending schemes and other economic stimuli are sustained to drive an economic recovery).

The outlook also varies by region with markets that enjoyed higher rates pre-crisis facing further to fall than the Eurozone, which has been living with low rates for some time.

We see four key priorities for corporate and transaction banking leaders in H2 2020 as they navigate this challenging and uncertain environment.