Corporate banking revenue to reach 2.8 trillion by 2020

28 July 2015 4 min. read

Total global corporate banking revenue is expected to grow to $2.8 trillion by 2020, research by the Boston Consulting Group shows. According to the firm, revenue growth is expected to increase for the industry across all regions, with the Asian-Pacific region to see 9% annual growth to 2020. Although revenues as a whole are expected to grow, the divergence in profitability between the top 75th percentile division and the bottom 25th percentile is bigger than it was in 2007.

A recent report from the Boston Consulting Group (BCG), titled ‘Global Corporate Banking 2015: The Look of a Winner’, explores the corporate banking sector to identify how well corporates banks are functioning. Not merely in the post crises environment but also in relation to larger trends affecting the industry as a whole. The background for the report, involves the 2014 edition of BCG’s Corporate Banking Performance benchmarking in which 250 corporate banking divisions took part.

Corporate banking
The corporate banking divisions are one of the main profit drivers for banks globally. The units account for almost half of the banking industry’s revenue pool globally and are estimated to grow by 7-8% annually through 2020. There are however considerable variations in terms of performance across the banking sector, with the profitability performance between top and bottom percentile divisions as high as 50%. BCG notes that the while the financial crisis has hit banks hard, there is much more going on which is affecting the profitability of corporate banks, including digitalisation, new regulation, disintermediation, and globalisation.

Performance gap between top and bottom percentile

Resolving pre-tax profit
Even though corporate banking continues to play a major role in the life cycle of banks, the latest benchmark from BCG shows that nearly two-thirds of banking divisions have returns on capital below the hurdle rate*. Particularly challenged were divisions in Western Europe, as well as in Central and Eastern Europe, where pre-tax returns were below 10%.

In terms of individual performances in Western Europe, the 75th percentile divisions made pre-tax returns slightly above the hurdle at 17%, while the bottom percentile divisions were underperforming their 2007 percentile counterparts by 7%. North American divisions were doing very well, with even the bottom percentile group overstepping the hurdle. Worldwide there is significant variation, with the 75th percentile returning above 2007 levels, but the underperformers falling 4% below their 2007 levels.

Profitability trend corporate banking

In terms of absolute numbers, the research finds that more than half of corporate banking divisions worldwide show declining economic profit over the previous three years. North American banking institutions, while performing above average, are experiencing a downward trend, as competition increases at 75% of divisions. In Western Europe, despite the turnaround initiatives at many banks, a large number of divisions — some 65% — have negative and declining economic profit. The Middle East has a 50-50 split between negative and declining and positive and improving profits. The Asia-Pacific region is performing relatively well, with only 26% negative and declining and 32% positive and improving.

BCG notes that “corporate banks with the right business model can create value in all segments and regions, despite local or segment-specific challenges. Even in Western Europe, which is one of the most difficult environments, top-quartile players consistently exceed typical hurdle rates.”

Growth in corporate banking revenue

Growing revenue
The research shows that while the profitability of the corporate banking division is trending downwards in many regions of the world, there is a long term positive trend for the growth of revenue in the sector for all regions. The Western Europe division revenue is expected to grow by 4% annually between 2012 and 2020 from $381 billion to $511 billion, while North America is expected to see a 6% annual growth from $316 billion to $486 billion by 2020. The Latin American and Middle East and African markets will both see 8% annual growth. The Asian-Pacific market will see the most impressive year on year growth of 9%, almost doubling from $722 billion in 2012 to $1,406 billion in 2020. The total revenue across all regions will by 2.88 trillion in 2020.

The profitable winners, according to BCG, will be the corporate banks that align themselves with the megatrends affecting the industry. For instance, by developing digital offerings and new businesses models focused on clear-eyed review of the current portfolio of client segments, products, and regions served, with “those that fail to adapt their business models run the risk of suffering prolonged, painful periods of underperformance.”

* BCG’s methodology uses a 16% pre-tax hurdle rate and assumes that regulatory capital is 10.5% of risk-weighted assets.