Corporate & Investment Banks: Striving to Sustain Returns
13 April 2021
An Oliver Wyman Report in Partnership with Morgan Stanley
Wholesale banks are delivering high returns. A decade of structural changes in the Markets and IBD businesses has led to more efficient balance sheet use and volatility capture, laying the groundwork for a resilient performance in the pandemic. We think improved 12%+ returns are sustainable given a positive macro and policy environment – a differentiated view as most investors have priced in a normalization of returns down to 10%. We see room to go even higher and unlock hidden value through a shift in focus to Transaction Banking – and particularly the high growth payments segment. To unleash growth, focus on recurring fees in the core business and shift towards servicesbased models. Act quickly to fend off disruption.
Sustainably higher returns for CIBs, but with a shift in focus to Transaction Banking. Wholesale banking businesses demonstrated resilience in the pandemic, delivering the best year in a decade with revenues up 7% YoY and return on equity (ROE) of 12%. The benefits of a diversified model were clear as Markets and IBD franchises grew by 26% last year, benefiting from structural changes that have reduced dependency on balance sheet and asset prices. These gains more than offset weaknesses in rate-sensitive businesses. While policy during the pandemic helped, 2020 returns are sustainable in our view. First, the macro backdrop is constructive with 7-10% Nominal GDP growth in 2021-22, and the expectation of a stable regulatory environment after a decade of reform. Second, banks can push even higher by unlocking hidden value in Transaction Banking. The fundamentals of this business remain strong, delivering through the cycle ROE of 30-45%. Yet there has been a vast transfer of value to non-bank players in this space over the past 3 years, with payments specialists like Adyen and Square gaining over >$1TN of market capitalization as banks have lost >$1TN. Non-bank business models have significant advantages, but the structural differences between wholesale businesses and other players do not warrant this gulf in valuation. Banks can narrow the value gap, and reassert their current leading position in the midst of market disruption, by doubling down on Transaction Banking.
Access the full report: Striving to Sustain Returns: How wholesale banks can unlock hidden value