Thomas Olsen: For C&I Banks, Searching for Light at the End of the Cycle

THOMAS OLSEN: It's a difficult, yet fascinating, time for wholesale banking markets, illustrated by almost daily news reports of two different types. On one hand, headcount reductions, billion-dollar losses and regulatory fines. And on the other, futuristic experiments with block chain, smart contracts, and cloud-based trading systems.

The first type of news is explained by the prolonged and unsustainably low return on capital driven by this real step-change in regulatory requirements and the extended down cycle in the rate environment and trading conditions. The more interesting question, however, is the second type of news: disruption enabled by technology, driven by ever-increasing demand for cheaper, faster and more transparent solutions, and the possibility now to supply those in very different ways and very different cost structures.

We're seeing these structural trends across products in transaction banking, where automation, white labeling, outsourcing, and partnerships, is starting to unbundle the value chain to global markets where electronification and futurization march across asset classes, accelerated by OTC clearing regulations.

The implications for banks vary significantly by type of bank and the starting position of the bank. But many banks face a real dilemma, caught between a rock and a hard place, where poor current performance means that either restructuring or investing for the future puts even more pressure on their current performance. The risk is that these banks choose to muddle through and delay the problem and definition of medium-term ambition until it's too late.

What does this mean for C&I B? Will it be attractive in the future? Yes. It will be attractive for some banks. But for many banks, they'll need to significantly narrow their ambition vs. today.

What will different paths of success look like? Some banks will be able to consolidate and really invest in innovation, particularly in global markets and transaction banking and more sophisticated products. While other banks will need to focus back on their core client franchises, invest in selective credit capabilities, and partner and outsource a lot of the technology and product capabilities they need.

In all cases, banks can do a better job of managing their client relationships and really understanding client needs across different segments. So what should banks do now? They need to ensure they're not blinded by today's performance challenges to the secular trends that are shaping the future and will define winners and losers through the cycle.

Read the Bain Brief: Corporate and Investment Banks Search for Light at the End of the Cycle