The corporate banking sector is expected to face a significant slowdown in the coming years due to an unfavorable macroeconomic environment and high interest rates, according to a study by consulting firm Bain & Company. Key sources of new revenue will be the financing of green investments and the utilization of artificial intelligence.
Experts at Bain & Company anticipate that sector revenues from 2023 to 2025 will grow by no more than 2% annually, compared to 8% from 2019 to 2022. The most pessimistic scenario, based on a survey among managers of the world’s largest corporate banks, suggests that industry revenues could even decline by an average of 2% annually in the coming years.
“Despite the expected easing of monetary policy by central banks, interest rates will remain high compared to previous years, which will weaken demand for corporate loans. Many in investment banking also expect that merger and acquisition activity will remain at a relatively low level due to fewer transactions involving private equity funds and high capital costs,” says Paweł Kozub, Associate Partner at Bain & Company.
Over half of the respondents (52%) describe the outlook for corporate banking as “average” and expect recessionary trends, especially in Europe, to negatively impact their operations. According to the survey, corporate loans, which generate about half of the sector’s revenue, will see annual growth dynamics ranging from -0.5% to +3.2% in the coming years.
Increasing investment in IT systems also puts additional pressure on the financial results of banks. Currently, corporate banks spend an average of 8-10% of revenues on IT investments, according to estimates by Bain & Company. Implementing innovative solutions becomes essential when over three-quarters of respondents believe that currently used technologies do not meet expectations in generating adequate value.
“Effectively implementing advanced technologies is becoming key to success. Modern technologies, such as cloud-native banking platforms and processes supported by artificial intelligence, can enable banks to automate complex tasks, thereby providing real-time customer service at lower costs,” claims Paweł Kozub. “However, a major challenge for corporate banks is optimizing IT investments, which are often chaotic and do not contribute to achieving strategic goals.”
As many as 72% of industry representatives believe that generative AI will fundamentally change the way banks operate, which are already using it to develop analyses for corporate clients, optimize basic processes, including loan automation, and manage regulatory requirements.
Financing the green transformation could be a valuable source of revenue for corporate banks. Experts at Bain & Company estimate that climate protection investments will require financing at the level of 1.4 trillion dollars annually by 2030, of which 550 billion dollars could be accounted for by corporate banks. This could generate 37 billion dollars in annual revenues for the sector, mainly from granted loans. Additional revenue sources will include transactions related to the carbon credit market.
More than half of the respondents (57%) believe that banks are adequately prepared to implement the climate agenda. However, many see the area of climate investments as challenging to operationalize, particularly in terms of reporting and obtaining appropriate data. A lack of willingness on the part of clients could also be a problem.
