According to a new report, the wholesale banking industry is in a good position to grow revenues in the next five years, as well as benefit from disruptive forces such as climate transition and digital assets. 

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The wholesale banking industry, encompassing investment banking (IB), transaction banking, lending and security services, has certainly had a good couple of years. Following a difficult reform and restructure phase from 2012 to 2019, the sector’s growth since the onset of the Covid-19 pandemic has been fuelled by sustained volatility, according to a joint report by Morgan Stanley and Oliver Wyman entitled ‘Climate, Crypto and Competing in this Cycle’.

Market volatility, as well as coordinated fiscal and monetary stimulus from governments, led to a 4.4% year-on-year increase in revenues in 2021, to nearly $600bn, and a 13.5% return on equity (ROE) in 2021, versus 9.5% in 2019. IB activities, specifically, saw a 35% uptick in revenues from 2019 to 2021.

And while there are challenges on the horizon, including geopolitical risks and inflationary environment, the report authors believe that the revenue potential of the wholesale banking industry is “higher now than at any point in the 2012-2019 period” and that the industry will be able to sustain revenue growth and more than 10% ROE moving forward.

The report identifies six market shifts that support a robust revenue outlook: corporate demand, rates normalisation, private markets demand, macro volatility, commodities volatility, and the China onshore opportunity. The authors estimate a cumulative revenue impact of $70bn over the next three years compared to the 2019 baseline.

They also believe that wholesale banks are positioned to manage and potentially benefit from two major disruptive forces on the next horizon: climate transition and digital assets.

Wholesale banks have the expertise and client franchise required to guide the transition of established industries to net-zero carbon emissions and build new green revenue streams, which could add $15bn-$20bn to industry fee pools over the next three to five years, according to the report. There is renewed interest in carbon trading, for example, an asset class that wholesale banks are well positioned to pursue.

While wholesale banks have been on the sidelines in the early stages of the digital assets revolution, mainly due to the absence of a clear regulatory framework, they do have the expertise and business model required to thrive in the new environment. According to the report: “We estimate there is as much as $5bn in revenue and $1bn in economic value added on the table now for wholesale banks from direct participation in the digital assets ecosystem, with even greater potential for fundamental shifts in the operating model for several core businesses over the longer term – most notably payments and custody.”

However, the report also warns that immediate action is needed now to stay in the game and compete with crypto-native firms. It identifies four “no regret” moves that banks can undertake immediately: evaluate participation choices and articulate risk appetite; invest in experiments (and ideally co-create with clients); build foundational capabilities in risk, compliance, technology, and operations; and expand direct engagement with regulators.

Execution, even more than business model, will mark out the leaders from the laggards in the wholesale banking industry, says the report. In addition to sustained investment in technology and creating a powerful narrative for clients and investors, winning the competition for talent is a critical focus area.

According to the report: “Wholesale banking remains a remarkably rich and effective training ground for top talent, but banks may have to stretch themselves in new ways to ensure that the value proposition and culture of the business keep pace with what the next generation of talent is looking for.”

Joy Macknight is editor of The Banker. Follow her on Twitter @joymacknight

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