Corporate banking is a tough business. Players everywhere are facing increasing competition, declining revenues, surging regulatory costs, spiking loan losses, and rising capital requirements. But not everyone is being dragged down. In fact, BCG’s most recent Corporate Banking Performance Benchmarking survey—of 300 corporate banking divisions around the world serving the small, midmarket, and large business segments—found a dramatic split between the best and the rest. More than 70% of Western European participants improved their economic profit from 2013 to 2015, generating value for their shareholders, compared with just one-third in North America and Asia. Despite these regional differences, it is noteworthy that top-performing corporate banking divisions delivered shareholder value in every segment and region, from small businesses in Asia to large corporations in Europe.
The corporate banking sector encompasses diverse segments within and across regions, each with varying business and economic dynamics. Nevertheless, this year’s survey revealed a few themes that cut across all those segments. First, nearly all participants in the study reported increased loan volume but falling margins. With interest rates low—even negative, in some markets—and an increasingly heated search for assets, downward margin pressure is likely to remain a fixture. Second, despite efforts to streamline operations and other expenses, operating costs remain stubbornly high for most banks, fueled by significant cost increases in compliance and risk. Embedded inefficiencies in traditional working practices add to the challenge, making it harder to extract savings, improve pricing, and manage risk. Third, while lower loan losses boosted performance for banks in some regions, firms in several Asian markets—as well as in economies such as the US that are affected by the volatility in oil prices—experienced a marked rise in loan losses.
What’s more, the corporate banking sector is in the throes of profound disruption—and it’s happening whether or not banks are fully ready.
The impact will only grow more sweeping as digitally enabled business models redefine the movement of data and money and change the economics of corporate banking business models.
Banking leaders face an urgent need to radically optimize performance and commit to a continuous digital transformation. Our benchmark data confirms the hazards of clinging to traditional credit-centric revenue models and static, inflexible operating practices. Incumbent banks must embrace deep, systemic digitization to stay relevant, open up new paths to sustained economic profit generation, and overhaul all key levers.
The time for this radical shift is now. Top players are already using digital approaches to boost corporate banking value creation and generate the profits needed to support far-reaching digital transformation—including next-generation corporate bank models, such as industry-specific ecosystems.
The trouble, of course, is that such evolution takes significant investment and, right now, banks are straining to keep up with current demands. To reshape their business and operating models and meet the challenges and opportunities presented by the postcrisis environment, corporate banking divisions must move swiftly to do the following:
- Define a vision and determine the digital capabilities necessary to improve the performance of all the classic levers of corporate banking, including salesforce effectiveness, end-to-end operations, risk, and capital and liquidity management.
- Invest in new digital offerings and business models.
- Fund the journey, starting with pricing and other near-term actions, such as procurement and organizational redesign, until digitally accelerated processes start to generate funds.
- Launch an effort, led by the corporate banking CEO and his or her C-suite executives, to change the culture and manage the transformation program successfully.