Wholesale banking experienced a period of expansion between 2019 and 2022 with a compound annual growth rate of around eight per cent, according to a Bain & Company report, “Five themes that will fundamentally change wholesale banking”, which predicts the ratio will be reduced to only 2 per cent in the most positive scenario between 2022 and 2025 (projections use 2022 as base year due to incomplete data available for 2023).
During the period, different areas within wholesale banking expanded at varying rates. Corporate lending income soared as net interest margins grew, with transaction banking volumes also expanding. These sectors offset a contraction in investment banking revenues as deal volumes dropped and capital markets flattened after Covid-induced enthusiasm waned.
In the same period, several global banks rebalanced their revenue streams to make their business more resilient. For example, according to the report, “JPMorgan Chase strengthened transaction banking, and Morgan Stanley sharpened its focus on asset and wealth management, which is capital light”.
Bain expects the growth of wholesale banking to continue until 2025 despite the area spending heavily on technology upgrades.
The consultancy forecasts that, in a positive scenario, wholesale bank revenue growth rates between 2022 and 2025 could only reach up to 2 per cent, with the weakest scenario projections showing revenues contracting to minus 2 per cent.
A number of factors explain the reduced growth prospects for the area. Higher interest rates likely will reduce demand for corporate loans. In investment banking, mergers and acquisitions activity is expected to remain subdued due to fewer private-equity-led deals and the high cost of debt. Meanwhile, lenders are setting aside an average of 8 to 10 per cent of annual revenues as IT investments. These trends are increasing pressure on profitability.
However, the study suggests leveraging climate-related financing as a new source of growth and revenue. The consultancy estimates that climate-related products and services will offer a $1.4tn opportunity in annual incremental financing globally in the period to 2030, with $550bn of this addressable by wholesale banks. This could generate a $37bn annual revenue poll, four-fifths of which would be from corporate lending.
