The world of corporate and investment banking (CIB) is undergoing a seismic shift, driven by changes in macroeconomic conditions, technological advancements, regulatory pressures, evolving market structures, and product innovation. For CIB organizations, these shifts present both challenges and opportunities that demand a fresh approach to strategy and operations.
In 2022, the CIB sector demonstrated resilience, generating an impressive $2.9 trillion in revenue and achieving a return on equity (ROE) of about 12%. However, these average figures conceal a stark reality: performance varies widely, with top firms outperforming their peers by as much as 700 basis points. This disparity raises important questions for boards, investors, and regulators, particularly as nonbank entities increasingly capture market share in areas like direct lending and wholesale payments.
To thrive in this evolving landscape, CIB organizations must break down their businesses into granular client and product segments. This granular analysis can uncover hidden pockets of excellence, enabling even struggling franchises to identify paths for growth. As they plan for the future, CIBs must navigate five critical shifts that are transforming their operating environment.
1. A Radically Different Macroeconomic Landscape
The current macroeconomic climate is influenced by ongoing geopolitical tensions and economic challenges. CIB organizations will face several significant changes:
- Higher Interest Rates: While increased rates may enhance profitability, they also create challenges for legacy portfolios, particularly in commercial real estate.
- Renewed Focus on Deposits: With shifting dynamics on the liability side of the balance sheet, banks must prioritize deposit gathering strategies.
- Disrupted Market Dynamics: Deal-making, trading, and cross-border transactions have been fundamentally altered.
To adapt, CIBs should develop new underwriting criteria, strengthen credit monitoring practices, and enhance deposit pricing and analytics capabilities.
2. Embracing the Technology Revolution
Technological advancements are reshaping client engagement in the CIB sector. The advent of generative AI opens up new possibilities for productivity and client interactions. To capitalize on these opportunities, organizations must make strategic investments tailored to their unique offerings while managing the associated risks effectively.
3. Adapting to Evolving Regulations and Risk Management
The finalization of foundational capital regulations and rising interest rates have heightened volatility and risk exposure for CIB portfolios. By adopting robust risk management practices, organizations can build resilience and gain a competitive edge. Key focus areas include new capital regulations, liquidity management, counterparty credit risk, and emerging challenges such as climate risk and AI-related risks.
4. Navigating New Market Structures
The rise of private credit players and tokenized assets is reshaping market dynamics. To stay competitive, CIB organizations should reevaluate their on-balance-sheet lending strategies and explore off-balance-sheet partnerships. As interest in digital assets grows, understanding these technologies and engaging with the ecosystem will be crucial for future success.
5. Capitalizing on Long-Term Sector Trends
With trillions of dollars needed for the transition to a net-zero economy, CIB organizations are increasingly focusing on the commercial opportunities linked to financing green initiatives. Additionally, sectors like infrastructure, energy, and life sciences present significant financial needs. To seize these opportunities, banks must build robust product capabilities and enhance cash management offerings.
Charting the Course Ahead
To navigate these transformative shifts, CIB organizations will need to create tailored playbooks that outline strategic actions. These playbooks should address immediate needs, build foundational capabilities for the medium term, and establish a roadmap for selective long-term investments.
As corporate and investment banks adapt to this new era, those who embrace these shifts with agility and foresight will be well-positioned to thrive in the evolving landscape.
Based on insights from McKinsey. Click here to read more: https://www.mckinsey.com/industries/financial-services/our-insights/five-big-shifts-shaping-a-new-world-for-corporate-and-investment-banks
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