NEW YORK, June 23, 2010 — Although some corporate banks are still reeling from the global financial crisis, others are successfully shifting their focus from damage control to capitalizing on the dynamics created by the downturn, according to a new report released today by The Boston Consulting Group (BCG).
The report, Crisis as Opportunity: Global Corporate Banking 2010, is based on a recent benchmarking study of industry participants and also draws on BCG’s proprietary corporate-banking database, which tracks global trends and identifies best practices among leading institutions.
About one-third of the business units in BCG’s database increased their economic profit from the end of 2007 through the end of 2009, the report says. Even as sister business units wrote down mortgage-backed securities or suffered severe credit-card losses, many corporate banks successfully repriced corporate loans, attracted new loan and deposit volume, and increased investment banking and risk management sales. Top performers enjoyed a profit surge, largely attributable to higher lending margins (which will likely fade as the financial sector and real economy build on improvements made in the first quarter of 2010).
For the broader group of survey participants—comprising “typical” corporate banks—the crisis brought a difficult operating environment, according to the report. For these banks, assuming a rough long-term pretax capital hurdle rate of 12 percent, economic profit is still well below 2007 levels, even if it did rebound in 2009 from the lows of 2008.
In terms of segment performance, in 2009, corporate banking business units serving the micro segment—companies with less than $2 million in annual revenues—posted by far the highest average return on regulatory capital, followed by small- and mid-cap business units (which were at roughly the same level) and then by large-cap business units. The large-cap segment was the toughest environment overall in which to create value.
In order to maximize current market opportunities, corporate banks must fully grasp the trends that will weigh heaviest on their industry, according to the study. The most powerful forces (or “megatrends”) are the continuing process of globalization, the shifting economic and industry structures of the new economy, and technological progress. In addition to these interconnected forces, banks must also grapple with the harsh fallout from the crisis and with the evolving, stricter regulatory environment. All of these dynamics will determine how corporate banks navigate the next decade.
The regulatory response to the crisis remains a work in progress, the report says. But it is virtually certain that a climate of greater conservatism and risk avoidance will prevail and that new regulations will have a material impact on the corporate banking industry. Reporting requirements will become increasingly onerous, placing another burden on finance and risk analysts serving the corporate banking business unit—as well as on frontline sales staff.
The report lays out a number of axioms that corporate banks should follow, based on BCG’s review of the experiences of top performers during the crisis and conversations with senior corporate-banking executives. Among these axioms are:
• Keep risk management at the top of the agenda
• Manage businesses to maintain a balanced portfolio with an “over the cycle” point of view
• Be extra cautious in forays outside of home markets
• Above all, cultivate deep client relationships
“Our research with the clients of corporate banks indicates that many are reviewing their banking relationships, seeking to diversify with multiple banks,” says Toronto-based Jürgen E. Schwarz, a coauthor of the report and leader of BCG’s worldwide corporate banking practice. “Clients are also more conscious of the need to choose banks with strong balance sheets and reputations, so that they will not become collateral damage in a bank’s next liquidity crunch.”
According to the report, the postcrisis era will witness the emergence of the “blue chip” corporate bank. “These banks will be the jewels in the portfolios of leading universal financial institutions,” says Schwarz. “They will generate steady long-term profit growth thanks to superior business models, excellent risk-management capabilities, and an overall approach that focuses on building a value-creating corporate-banking franchise. “
The report says that blue-chip banks have five core priorities that all corporate banks should embrace: building premium client relationships, creating a culture of risk awareness and accountability, enhancing transaction banking capabilities, forging the next-generation operating model, and developing end-to-end transparency and a high-performance organization. Banks that execute these initiatives well will have a far greater chance of thriving in the postcrisis environment than slower-moving banks that take a wait-and-see attitude.
To receive a copy of the report or arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.