Corporate Banking: How to survive in the face of tough competition

Par Walter Sinn, Jan-Alexander Huber, Dr. Christian Graf and Robert Bischof

Etude

Corporate Banking: How to survive in the face of tough competition

Par Walter Sinn, Jan-Alexander Huber, Dr. Christian Graf and Robert Bischof

First published on juillet 23, 2015
min


Rising earnings and a high return on equity were what defined the corporate client business of German banks in the years following the financial crisis. But the good times are over – at least for the time being. In the second half of 2014 the Corporate Banking Index of Bain & Company, which converts the raw data of leading financial institutions into meaningful trends, could be seen heading steadily downhill. In the meantime, earnings are 16 index points down on the figure for the end of 2012, while the profitability indicator is a massive 33 index points down. The main reasons for the drop in earnings are persistently low interest rates riding on the back of falling margins into the face of harsh competition. Both factors have dealt a particularly serious blow to the lending business – corporate banking's ultimate anchor product. Exactly 73 percent of earnings in the second half of 2014 derived from net interest income. The lending volume has risen slightly of late, but the credit margin has still fallen to 1.5 percent which makes it only 0.2 percentage points higher than the historic lows of 2007/2008. Loan loss provisions might still be moderate and administrative expenses stable, but a great deal still needs to be done to halt the decline in profitability. Meanwhile the pre-tax return on equity of 16 percent is not even half the level achieved in the record year 2011. The current level of the Corporate Banking Index thus underscores the need for action in what is nevertheless still a profitable and high-yielding business area. According to one Bain forecast, earnings in the corporate client business will increase again in the years ahead – by an average 1.4 percent per year to € 27.1 billion by 2017. Banks can expect higher growth rates particularly in transaction banking (i.e. cash management, payments, trade finance) as well as in the commission-based businesses with equities and bonds. These services are especially popular with larger-scale enterprises. In 2014 companies with sales of more than € 250 million accounted for around one third of the earnings in the corporate client business. If banks want to be successful in their business dealings with large corporate entities as well as with smaller enterprises, and to withstand the earnings pressure, they will have to cultivate their corporate client business. A crucial factor will be digitalization throughout the entire value-added chain. This is because, according to multiple surveys and analyses, financial institutions will find themselves falling behind in corporate banking in the years ahead if they fail to devise a comprehensive range of digital solutions, most importantly a comprehensive omni-channel alignment. This is true all the more because of the appearance of new suppliers, the so-called FinTechs, which are increasingly overrunning the financial services industry particularly in business with small and medium-sized enterprises. But by applying countermeasures in good time and rigorously using up the existing earnings potentials by addressing customers’ needs more efficiently – and also streamlining distribution management – higher earnings will be seen to be ratcheting up in the years to come. And corporate banking will once again see a return to the good years. Download PDF

Rising earnings and a high return on equity were what defined the corporate client business of German banks in the years following the financial crisis. But the good times are over – at least for the time being. In the second half of 2014 the Corporate Banking Index of Bain & Company, which converts the raw data of leading financial institutions into meaningful trends, could be seen heading steadily downhill. In the meantime, earnings are 16 index points down on the figure for the end of 2012, while the profitability indicator is a massive 33 index points down.

The main reasons for the drop in earnings are persistently low interest rates riding on the back of falling margins into the face of harsh competition. Both factors have dealt a particularly serious blow to the lending business – corporate banking's ultimate anchor product. Exactly 73 percent of earnings in the second half of 2014 derived from net interest income. The lending volume has risen slightly of late, but the credit margin has still fallen to 1.5 percent which makes it only 0.2 percentage points higher than the historic lows of 2007/2008. Loan loss provisions might still be moderate and administrative expenses stable, but a great deal still needs to be done to halt the decline in profitability. Meanwhile the pre-tax return on equity of 16 percent is not even half the level achieved in the record year 2011.

The current level of the Corporate Banking Index thus underscores the need for action in what is nevertheless still a profitable and high-yielding business area. According to one Bain forecast, earnings in the corporate client business will increase again in the years ahead – by an average 1.4 percent per year to € 27.1 billion by 2017. Banks can expect higher growth rates particularly in transaction banking (i.e. cash management, payments, trade finance) as well as in the commission-based businesses with equities and bonds. These services are especially popular with larger-scale enterprises. In 2014 companies with sales of more than € 250 million accounted for around one third of the earnings in the corporate client business.

If banks want to be successful in their business dealings with large corporate entities as well as with smaller enterprises, and to withstand the earnings pressure, they will have to cultivate their corporate client business. A crucial factor will be digitalization throughout the entire value-added chain. This is because, according to multiple surveys and analyses, financial institutions will find themselves falling behind in corporate banking in the years ahead if they fail to devise a comprehensive range of digital solutions, most importantly a comprehensive omni-channel alignment. This is true all the more because of the appearance of new suppliers, the so-called FinTechs, which are increasingly overrunning the financial services industry particularly in business with small and medium-sized enterprises. But by applying countermeasures in good time and rigorously using up the existing earnings potentials by addressing customers’ needs more efficiently – and also streamlining distribution management – higher earnings will be seen to be ratcheting up in the years to come. And corporate banking will once again see a return to the good years.