• Research

Wholesale Banks Refocus on Corporate Clients

Changing dynamics have put pressure on the institutional side of the wholesale banking business, but growing demand for corporate banking services could offer notable upside for select European banks.

Global economic growth, easing capital pressures and the prospect of rising rates are all positive themes for wholesale banks. However, these themes are only part of the story.

Although we at Morgan Stanley Research believe revenues will pick up by 5% in 2018, the future success of these banks could hinge on whether they can tilt their focus toward the fast-growing corporate segment—without losing sight of institutional clients. 

In Europe, a combination of negative rates and high cash balances could make the tailwind of rising rates even more powerful.

The reason? We expect revenues for corporate banking to grow at a compound annual growth rate (CAGR) of 4% over the next few years, which is double the rate of institutional growth.  

While the right revenue mix is a linchpin for overall earnings growth for most of this group, it is particularly true for European banks, which have been losing market share to their U.S. counterparts. Since 2013, large U.S. banks as a group have gained 8 percentage points of market share based on revenue in Europe, while the European banks have lost about 7 percentage points of North American market share.

Although U.S. banks are well positioned to answer the growing demand from corporate clients, we think 2018 could be a watershed year for select European banks. On the heels of capital raises and balance restructuring, they are turning their attention back to growing their businesses.

In a recent Bluepaper, “Winning Under Pressure,” we partnered with management consulting firm Oliver Wyman to identify which wholesale banks are best positioned to capitalize on these shifting dynamics. Notably, two of the four banks on our preferred list are based in Europe. Among other factors, the combination of ties to domestic markets coupled with global capabilities, technological innovation and deep roots in corporate banking put some of the European banks in our coverage in a unique position to capture a greater share of the corporate wallet. 

 

U.S. and European Banks’ Market Share Evolution (2012-17, %)

Source: Oliver Wyman analysis

A New Era for Corporate Banking

To understand the outlook for wholesale banks, my colleagues and I analyzed the business models of wholesale banks based on client type, as opposed to focusing solely on product type. A combination of structural and cyclical drivers, we concluded, puts most of the banks in our coverage at a major inflection point.

Historically, wholesale banks have derived more than half of their revenue from institutional clients than from corporate clients, but that balance has already begun shifting toward the corporate side of the business. By 2020, we expect that institutions will account for 55% of the wholesale wallet, down from 57% today.  While this side of wholesale banking will still play a significant role, the needs of the corporate world will be growing faster than that of the institutional world. 

 

Share of Wholesale Bank Revenues (Corporate vs. Institutional)

Source: Company data, Morgan Stanley Research estimates (E)

Structurally, the dynamics are twofold: On the one hand, mounting pressures on fees charged by asset managers and other financial services clients are likely to result in slower growth for wholesale banks’ institutional wallets. In the near-term, institutional banking could get a boost from rising volatility, but we expect revenue growth for this side of the business to slow to a 2% CAGR for the industry over the next three years.

On the other hand, demand for corporate banking is steadily picking up as the needs of corporations are getting ever more global and complex; even smaller companies are now managing cross-national supply chains, receivables, and related currency and rate risks.

This is driving high-margin, high-touch strategic services and transactions—what we call CFO-up—as well as day-to-day corporate banking functions—or what we call CFO-down. Indeed, as more companies manage supply chains and receivables from around the globe, they require more sophisticated treasury, cash management, FX solutions and financing. This is not only the fastest-growing subsection of wholesale banking, it is also the least volatile. 

 

Strong Projected Growth in the CFO-down Client Segment

Source: Company Data, Morgan Stanley Research.

Meanwhile, on the cyclical side, rising interest rates are also a positive for corporate banking.  As rates normalize, deposit spreads could improve substantially to the tune of about $10 billion globally based on our estimates. This may be amplified in Europe, where a combination of negative rates and high cash balances make the tailwind of rising rates even more powerful.

Insights on the latest trends and outlook for the financial sector are based on the recent Bluepaper, “Wholesale Banks & Asset Managers: Winning Under Pressure” (Mar 14, 2018), a collaborative report between Morgan Stanley Research and Oliver Wyman. 

Institutional clients can ask their Morgan Stanley representative for the full report. Wealth Management clients can ask their Morgan Stanley Financial Advisor for a copy, or access the report by logging into their Morgan Stanley Online account. Get more Morgan Stanley Research and Ideas, or find a Financial Advisor.