Bcg Banking 2020
- 1. R G C B Crisis as Opportunity
- 2. The Boston Consulting Group (BCG) is a global manage- ment consulting firm and the world’s leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep in- sight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable compet- itive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 69 offices in 40 countries. For more infor- mation, please visit www.bcg.com.
- 3. Crisis as Opportunity G C B Jürgen E. Schwarz Martin Buchar Gennaro Casale Oliver Dany Keith Halliday Nicolas Harlé Junichi Iwagami Duncan Martin Matthew Rogozinski Achim Schwetlick Tjun Tang June 2010 bcg.com
- 4. © The Boston Consulting Group, Inc. 2010. All rights reserved. For information or permission to reprint, please contact BCG at: E-mail: bcg-info@bcg.com Fax: +1 617 850 3901, attention BCG/Permissions Mail: BCG/Permissions The Boston Consulting Group, Inc. One Beacon Street Boston, MA 02108 USA
- 5. Contents Executive Summary 5 Megatrends Shaping the Corporate Banking Landscape 8 Globalization 2.0 8 The New Economy 9 Advancing Technology 10 Fallout from the Crisis 11 The Lessons of the Crisis 15 The New-Normal Regulatory Environment 17 The Blue-Chip Corporate Bank: How Top Institutions Are Positioning Themselves to Win 18 Building Premium Client Relationships 18 Creating a Culture of Risk Awareness and Accountability 19 Enhancing Transaction Banking Capabilities 20 Forging the Next-Generation Operating Model 22 Developing End-to-End Transparency and a High-Performance Organization 23 Conclusion: Asymmetric Competition and How the Leaders Will Deepen Their Advantage 26 For Further Reading 27 Note to the Reader 28 C O
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- 7. Executive Summary T he publication of Crisis as Opportunity, BCG’s crisis or even those that enjoy modestly higher margins in the fourth report on the global corporate-banking near term. The winners will be those that actually leverage industry, comes at a time when the priority of the market dynamics brought on by the downturn to their ad- many corporate-banking leaders is shifting vantage, internalizing the lessons and sharpening their strat- from damage control to finding ways to capital- egies, processes, and value propositions for the long haul. This ize on opportunities created by the global financial crisis. report focuses on the steps that corporate banks must take to rise to this challenge. The downturn has obviously been painful for the corporate banking business. And difficulties stemming from slow eco- As in the past, our report draws on BCG’s Global Corporate- nomic growth in some countries, the financial distress of Banking Benchmarking Database, covering more than 100 clients, and lagging corporate loan losses—which can financial institutions around the world. The database tracks peak months or years aer economic recovery begins—will global trends and helps identify the best practices of the most continue. sophisticated corporate banks operating in the most challeng- ing markets. Nonetheless, the crisis has so far been surprisingly good to many corporate-banking business units. Many of the partici- In the postcrisis era, corporate banks must fully grasp pants in our global benchmarking exercise conducted in early the trends that will weigh heaviest on their industry. 2010 reported rising economic profit from the end of 2007 The most powerful forces (or “megatrends”) are the through 2009, even in countries that were particularly hard- continuing process of globalization, the shiing eco- hit by the so-called Great Recession. This improvement was nomic and industry structures of the new economy, mostly attributable to significant increases in lending mar- and technological progress. In addition to these inter- gins (which will likely fade as the financial sector and real connected forces, banks must also grapple with the economy build on the progress they showed in the first quarter harsh fallout from the crisis and with the evolving, of 2010). Also, in many cases, loan losses have not thus far stricter regulatory environment. All of these dynam- been as bad as originally feared. ics will determine how corporate banks navigate the next decade. Yet one thing is certain: we are entering a new competitive environment as banks try to seize the opportunities created ◊ The effects of “globalization 2.0” on corporate banks by the crisis. Success will oen come at the expense of weaker will be significant. Even relatively small companies rivals. Moreover, a key factor will be the strength of the par- will participate, oen as part of intricate, far-reaching ent bank’s balance sheet in supporting the growth ambitions supply chains. Growing enterprises, such as those of the corporate banking business unit. But having a strong based in Brazil, Russia, India, and China (the BRIC balance sheet will not be enough to succeed. countries), will need a full range of sophisticated bank- ing services. The potential revenues to be gained from Indeed, the most successful corporate banks over the next few these trends will be sizable, but capturing them will years will not necessarily be those that have best survived the require a nimble and creative approach. C O
- 8. ◊ Five key aspects of the new economy will exert the banking executives, BCG has identified a number of greatest impact on corporate banks: increasing com- axioms that corporate banks would do well to re- petitive intensity, industry-specific banking needs, on- member. going consolidation, closer supply-chain integration, and the search for top talent. ◊ These axioms include: keep risk at the top of the agen- da, manage your businesses to maintain a balanced ◊ Despite continuing advances in technology, very few portfolio with an “over the cycle” point of view, be ex- corporate banks have the platforms in place to ensure tra cautious in forays outside of home markets, and leading functionality and connectivity for clients, as above all, cultivate deep client relationships. well as efficient and effective sales-to-service process- es. These shortcomings result from a variety of factors, ◊ Our research with corporate banking clients indicates including investment limits and the low priority of the that many are reviewing their banking relationships, corporate banking unit compared with the bank’s (usu- seeking to “diversify their portfolio” with multiple ally larger) retail business unit. Corporate banks must banks. Clients are also more conscious of the need to reverse this trend in order to become market leaders. choose banks with strong balance sheets and reputa- tions, so that they will not become collateral damage The financial crisis has had a devastating effect on in a bank’s next liquidity crunch. many banks overall, but its impact on corporate bank- ing business units has been more nuanced. There The regulatory response to the crisis remains a work have been winners and losers. in progress. But it is virtually certain that a climate of greater conservatism and risk avoidance will prevail ◊ About one-third of business units in BCG’s Global Cor- and that new regulations will have a material impact porate-Banking Benchmarking Database increased on the corporate banking industry. Reporting require- their economic profit between the end of 2007 and the ments will become increasingly onerous—placing an- end of 2009. Even as sister business units wrote down other burden on finance and risk analysts serving the mortgage-backed securities or suffered severe consum- corporate banking business unit, as well as on front- er-lending losses, many corporate banks successfully line sales staff. repriced corporate loans, attracted new loan and de- posit volume, and increased investment-banking and ◊ There are four interconnected issues whose regulation risk-management sales. Top performers enjoyed a prof- will significantly affect corporate banking: risk mea- it surge. surement (including risk-weighted assets, or RWA), capitalization, leverage ratio, and liquidity risk. The ◊ For the broader group of survey participants—com- impact of changes in these areas will vary by product prising “typical” corporate banks—the crisis has and segment. brought a difficult operating environment. Assuming a rough long-term pretax capital hurdle rate of 12 per- ◊ It will be critical for corporate banking executives to cent, their economic profit is still well below 2007 lev- monitor developments and ensure that their banks re- els. But it rebounded in 2009 from the lows of 2008. tain the flexibility to respond to regulatory changes as they become finalized. ◊ In terms of segment performance, in 2009, corporate banking business units serving the micro segment had The postcrisis era will witness the emergence of the by far the highest average return on regulatory capital, blue-chip corporate bank. followed by small- and mid-cap (at roughly the same level) and then by large-cap business units. The large- ◊ These banks will be the jewels in the portfolios of lead- cap segment was the toughest environment overall in ing universal financial institutions. They will generate which to create value. steady long-term profit growth thanks to superior busi- ness models, excellent risk-management capabilities, Aer reviewing the experiences of top performers and an overall approach that focuses on building a val- during the crisis and speaking with senior corporate- ue-creating corporate-banking franchise. T B C G
- 9. ◊ BCG’s case work and benchmarking efforts have iden- ager of the global Wholesale Banking segment in BCG’s tified five core priorities of the blue-chip corporate Toronto office. You may contact him by e-mail at halliday. bank that leading institutions are already embracing: keith@bcg.com. Nicolas Harlé is a partner and manag- building premium client relationships, creating a cul- ing director in the firm’s Paris office. You may contact him ture of risk awareness and accountability, enhancing by e-mail at harle.nicolas@bcg.com. Junichi Iwagami is transaction banking capabilities, forging the next-gen- a partner and managing director in BCG’s Tokyo office. eration operating model, and developing end-to-end You may contact him by e-mail at iwagami. transparency and a high-performance organization. junichi@bcg.com. Duncan Martin is a partner and man- aging director in the firm’s London office. You may con- About the Authors tact him by e-mail at martin.duncan@bcg.com. Matthew Jürgen E. Schwarz is a senior partner and managing Rogozinski is a partner and managing director in BCG’s director in the Toronto office of The Boston Consulting Melbourne office. You may contact him by e-mail at Group and the leader of the global Wholesale Banking rogozinski.matthew@bcg.com. Achim Schwetlick is a segment. You may contact him by e-mail at schwarz. partner and managing director in the firm’s New York of- juergen@bcg.com. Martin Buchar is a partner and man- fice. You may contact him by e-mail at schwetlick.achim@ aging director in the firm’s Prague office. You may contact bcg.com. Tjun Tang is a partner and managing director him by e-mail at buchar.martin@bcg.com. Gennaro Ca- in BCG’s Hong Kong office. You may contact him by e- sale is a partner and managing director in BCG’s Milan mail at tang.tjun@bcg.com. office. You may contact him by e-mail at casale.gennaro@ bcg.com. Oliver Dany is a partner and managing director in the firm’s Frankfurt office. You may contact him by e- mail at dany.oliver@bcg.com. Keith Halliday is the man- C O
- 10. Megatrends Shaping the Corporate Banking Landscape R egardless of one’s views on what will hap- sumers, and government resistance to offshoring will rein pen next as the global financial crisis it in. evolves, it is clear that corporate banking executives face an altered landscape. Only In our view, however, although market dynamics such as one thing is beyond doubt: amid a rapidly those leading up to 2007 may never return, we are still changing global economy, corporate banks must adapt likely to see the emergence of “globalization 2.0.” For ex- and forge insightful, long-term strategies if they hope to ample, BCG forecasts that the share of global GDP gener- gain competitive advantage. ated in the Asia-Pacific region will rise to almost 40 per- cent by 2020, from around 30 percent in 2010. Roughly as Specifically, corporate banks must react to sweeping much foreign direct investment is now flowing from trends that are affecting how companies do business all emerging markets into mature ones as in the other direc- over the world. For example, many erstwhile emerging tion—upending a multiyear trend. The number of com- economies have moved into the mainstream. More and panies from Brazil, Russia, India, and China (the BRIC more companies—not just large multinationals—are in- countries) in the Fortune 500 has more than doubled, creasingly integrated into domestic and global supply from 27 companies in 2005 to 58 in 2009. In terms of mar- chains and are looking to their banks for “financial sup- ket capitalization, four of the top ten banks in the world ply chain” solutions to assist them. Technological advanc- are now based in Asia-Pacific.1 es continue at a rapid pace. The effects of globalization 2.0 on corporate banks will Corporate banks must also fully grasp the trends that will be significant. On the client side, more and more compa- weigh heaviest on their industry. The most powerful forc- nies will be internationally active. Even relatively small es (or “megatrends”) are the continuing process of global- companies will participate, oen as part of intricate, far- ization, the shiing economic and industry structures of reaching supply chains. Growing enterprises such as those the new economy, and technological progress. In addition based in the BRIC countries will need a full range of to these interconnected forces, banks must grapple with banking services as they sell automobiles, computers, and the harsh fallout from the crisis and with the evolving, myriad other goods in the United States, Europe, and stricter regulatory environment. All of these dynamics elsewhere. The potential revenues to be gained from will determine how corporate banks navigate the next de- these trends will be sizable, but capturing them will re- cade. quire a nimble and creative approach. For example, ex- actly what kind of innovative financial-supply-chain ser- vices are needed? And how might the sales forces of Globalization 2.0 domestic European or U.S. banks capture the business of BRIC multinationals expanding abroad? Some pundits claim that the crisis will curtail globaliza- tion. They argue that factors such as protectionist policies 1. See After the Storm: Creating Value in Banking 2010, BCG report, in countries with high unemployment, impoverished con- February 2010. T B C G
- 11. Globalization 2.0 will also affect the competitive land- Increasing Competitive Intensity. The International scape in corporate banking. For example, some new com- Monetary Fund’s (IMF’s) April 2010 World Economic Out- petitors may potentially emerge from the BRIC countries look report predicts economic growth in the euro zone to replicate in banking what aggressive companies such and Japan of just 1 to 2 percent through 2015, with that as Haier, ArcelorMittal, and Embraer have achieved in in- of the United States being marginally higher at 2.4 to 3.1 dustries as diverse as appliances, steel, and aircra manu- percent. Amid such relatively modest economic expan- facturing. As BRIC banks follow their clients into estab- sion, the race for clients, market share, and profits will be lished markets, their rivalries with both more frenzied than ever. The chief impli- local and global-titan banks will unques- cation for corporate banks is that clients tionably heat up. No large corporate will be increasingly sensitive about mar- bank will be immune gins and fees. Weaker competitors will On the operational side, banks will face in- start to compete on prices, and clients will to the effects of creasing choices about how to internation- pressure incumbent banks to lower theirs, alize their back offices, which they must globalization. forcing these banks to become more effi- do in order to capture scale and seamless- cient. But clients will also be more open to ly serve multicountry clients. For example, banking solutions (such as industry-spe- they can create “international product factories” that cialized payment solutions) that help them cut costs and serve clients in multiple countries. They can also emulate compete more effectively. many retail banks and pursue more offshoring and out- sourcing solutions, although political and regulatory con- Industry-Specific Banking Needs. Some industries are siderations may block this path to some degree. sweet spots for corporate banks because of their relative- ly rapid growth rates and specific product needs. Such dy- Ultimately, no large corporate bank will be immune to namics are oen present in industries experiencing a the effects of ongoing globalization. And growth-oriented long-term shi from manufacturing to services, and thus banks will be tempted by the rapidly developing econo- from credit-heavy banking relationships to a greater mix mies. BCG estimates that over 40 percent of total global of transactions and deposits. Take health care as an ex- revenue growth in corporate banking between 2009 and ample. BCG’s research indicates that in the United States, 2019 will come from the BRIC nations. health care companies earning revenues from $10 million to $500 million grew at 17 percent annually from 2002 Still, banks must tread carefully if they wish to capitalize through 2007. This was a much faster rate than that of on this opportunity. Corporate banking is in many ways most other industries, and these companies generated a a local business with significant barriers to entry, espe- more attractive mix of corporate banking revenues than cially in the small- and mid-cap segments. There are nu- the average client. Yet our 2009 benchmarking data show merous examples of banks whose forays into internation- that some banks have been much more successful than al markets have ended in costly failure. These episodes, their peers at penetrating these growth industries. in addition to regulatory pressure and capital scarcity, may result in fewer banks embarking on foreign growth Ongoing Consolidation. Continuing globalization and in- sprees. Rather than pursue credit-led expansion and take creasing competitive intensity will continue to spur con- on local players with superior local knowledge, some in- solidation in many industries. Corporate banks that want stitutions may find that focusing on their existing client to serve top companies as well as up-and-coming midmar- bases is a clearer, less risky path to growth. ket ones will need investment banking capabilities. In ad- dition, cross-border consolidation should increase the number of clients that look to their banks for multicoun- The New Economy try solutions across payments and trade finance. The coming years will be highly challenging for compa- Closer Supply-Chain Integration. The trend we have nies in virtually all industrial sectors—as well as for the seen in recent years toward deeper integration along sup- banks that serve them. Five key trends will exert the ply chains will continue, although it will undoubtedly be greatest impact. affected by other global trends, such as rising energy costs C O
- 12. (which will increase transportation costs). As companies However, in this age of ubiquitous connectivity, expand- integrate with their business partners more closely (both ing bandwidth, and massive computing power, corporate domestically and across borders), they will be looking for banking clients themselves continue to invest in better parallel financial-supply-chain services from their banks. financial systems. Companies of every size are trying to connect more seamlessly with their banks, whether The Search for Top Talent. BCG’s case work with corpo- through more sophisticated online data-transfer functions rate banking clients around the world has consistently for small and midsize clients or through deeper integra- identified talent management as a growing tion with large corporate enterprise-re- area of concern. Competition for top tal- source-planning systems. This growing cli- ent—such as senior relationship managers Companies of all sizes ent need will have important implications (RMs), bad-loan workout specialists, and are trying to connect for banks trying to increase share in trans- investment bankers who are experienced action banking. Indeed, customers are more seamlessly with in priority emerging markets—is hotter looking for a variety of benefits: better than ever. Banks will also need managers their banks. ease of use (to reduce the amount of inter- with skills in such areas as leveraging new nal training that they need to provide), IT capabilities and optimizing end-to-end greater breadth in the products and servic- loan processes. As banks reenter a growth mode and the es they can access through self-service portals, better in- baby-boom generation begins to retire, finding the talent tegration and customization, and improved two-way com- needed to navigate a large corporate bank through the munication. evolving megatrends will be more challenging than ever. Corporate banks must meet this challenge by forging a Moreover, banks that can build deep, rich, real-time data clear strategy for talent acquisition, management, and re- and analytics capabilities will be able to develop a holis- tention. tic view of each client relationship—including product utilization patterns and risk, liquidity, and capital factors. Such banks will be able to significantly improve product Advancing Technology targeting, pricing, and risk management. They will also improve client targeting through techniques such as cli- Despite continuing advances in technology, very few cor- ent clustering. porate banks have the platforms in place to ensure lead- ing functionality and connectivity for clients, as well as Banks will continue to build more electronic platforms efficient and effective sales-to-service processes. These that automate core processes involving account opening, shortcomings result from a variety of factors, including lending, and transaction banking on an end-to-end basis investment limits and the low priority of the corporate from the customer to the back office. Automation and al- banking unit compared with the bank’s (usually larger) gorithms that catch and correct data-entry errors will re- retail business unit. sult in higher rates of straight-through processing, greater client satisfaction, and lower costs. In areas where human Indeed, while many retail institutions have powerful cus- processing is still required, advances in data storage and tomer-information platforms, numerous corporate banks imaging technology will allow greater use of centralized still have disjointed management-information systems in and offshored processing centers, as well as skills-based which applications for core businesses such as cash man- routing techniques. agement and trade finance exist on different platforms— and contain different client information that is difficult to In addition, advances in automated decision intelligence compare. At some corporate banks, extensive manual will allow more sophisticated treatment of loan applica- processes are required to extract data from more than 20 tions and fraud detection, as well as improve ongoing cli- different systems to create a “full wallet” view of any in- ent monitoring and collections. Banks will, of course, dividual client. Moreover, complex legacy sales tools hin- need to remember that reliance on models and automat- der sales force productivity. Lending processes remain pa- ed tools can be dangerous if it replaces human judgment per intensive. The result can be a long, error-prone in critical areas. But advanced intelligence engines hold experience for clients. promise both as cost savers in simple decisions such as T B C G
- 13. micro and small-business loans and as electronic aids to At numerous banks, these achievements have been more prioritization that can help staff focus on the right client than enough to offset rising corporate loan losses, at least files and risk decisions. at this point in the credit cycle. Loan volumes and mar- gins spiked early in the crisis, although they started to fade somewhat in the first quarter of this year in many Fallout from the Crisis countries. Transaction payment volumes plummeted and, given extremely low short-term interest rates, so did de- The financial crisis has had a devastating effect on many posit margins. Yet investment banking, risk management, banks overall. But its impact on corporate banking busi- and other fee revenues have been buoyant, if volatile, in ness units has been more nuanced. There have been win- many areas. Despite higher loan losses overall and con- ners and losers. tinued cost pressure, the net result that we see for top performers is a surge in economic profit. About one-third In fact, many of the participating business units in BCG’s of corporate banks improved their economic profit from Global Corporate-Banking Benchmarking Database the end of 2007 to the end of 2009.2 (See Exhibit 1.) managed to improve their economic profit in the course of the crisis. Even as sister business units wrote down For the broader group of our survey participants, howev- mortgage-backed securities or suffered severe consumer- er—comprising “typical” corporate banks—the crisis has lending losses, many corporate banks successfully re- priced corporate loans, attracted new loan and deposit 2. This refers to benchmarking participants based in developed volume, and increased investment-banking and risk-man- markets. In emerging markets, a higher proportion of benchmark- agement sales. ing participants showed improving economic profit. Exhibit 1. About One-Third of Corporate Banks Improved Their Economic Profit from the End of 2007 Through 2009 Economic profit growth of European, North American, and Australian corporate banks during the financial crisis Growing Negative but improving Positive and growing % of % of participants participants 51 50 50 34% of banks have improving 23 economic profit 25 25 10 11 0 0 2005–2007 2008–2009 2005–2007 2008–2009 Economic profit trend Negative and shrinking Positive but shrinking % of % of participants participants 50 50 50 35 25 17 25 4 0 0 2005–2007 2008–2009 2005–2007 2008–2009 Shrinking Negative Positive Economic profit starting point Source: BCG Global Corporate-Banking Benchmarking Database. Note: Economic profit calculated based on regulatory capital of 8 percent of Basel II RWA, using a long-run pretax capital hurdle rate of 12 percent. C O
- 14. brought a difficult operating environment. Assuming a and then by large-cap business units. Let’s take a closer rough long-term pretax capital hurdle rate of 12 percent, look at the segments. their economic profit is still well below 2007 levels. None- theless, it rebounded in 2009 from the lows of 2008. (See The Micro Segment (Serving Clients with Less Than Exhibit 2.) Going forward, of course, scarcer capital and $2 Million in Annual Sales Revenue). It is clear that mi- changes to capital regulations will likely drive rises in hur- cro segments can generate very high profitability. This is dle rates, which will negatively affect economic profit. oen driven by “transaction champion” strategies in which more than 70 percent of revenues come from trans- In terms of segment performance, in 2009, corporate action fees and deposit products. (See Exhibit 3.) Com- banking business units serving the micro segment had by bined with scale economies from leveraging the retail far the highest average return on regulatory capital, fol- bank’s branches and back office, this dynamic enables lowed by small- and mid-cap (at roughly the same level) most small-business segments to ride out even sharp rises Exhibit 2. The Typical Corporate Bank Saw Economic Profit Rebound in 2009 Evolution of key drivers based on weighted averages for all participants, 2007–2009 (indexed to 2007) Loan margin 100 98 114 2007 2008 2009 Economic profit Pretax operating profit Revenue Loan volume is a 122 is a 100 121 120 100 79 100 99 102 100 113 73 function minus function of of 2007 2008 2009 2007 2008 2009 2007 2008 2009 2007 2008 2009 Regulatory capital 1 Cost Transaction and deposit margin 100 123 122 100 111 110 100 99 82 2007 2008 2009 2007 2008 2009 2007 2008 2009 Pretax capital hurdle Actual loan losses Deposit volume rate (%)2 472 274 100 100 109 122 12 12 12 2007 2008 2009 2007 2008 2009 2007 2008 2009 Other fee revenues 100 104 123 2007 2008 2009 Source: BCG Global Corporate-Banking Benchmarking Database. Note: This analysis excludes a small number of participants with severe loan-loss crises (i.e., loan losses greater than 80 percent of their 2009 revenue). 1 Defined as 8 percent of Basel II RWA. 2 Assumed long-run pretax capital hurdle rate of 12 percent used for all years. T B C G
- 15. Exhibit 3. High Deposit and Transaction Revenues Have Lifted the Micro Segment All-participant average, 2009 (basis points per RWA unless otherwise noted) Pretax return on Revenue Loan revenue regulatory capital (%) 1,500 600 40 is a function 1,000 plus 400 20 of 500 200 0 0 0 Deposit and Cost-to-income ratio (%) transaction revenue 80 800 60 600 40 400 20 200 0 0 Investment banking Actual loan losses risk-management revenue 400 200 200 100 0 0 1 Regulatory capital Other revenue 1,000 750 400 Micro Mid-cap 500 200 250 Small-cap Large-cap 0 0 Source: BCG Global Corporate-Banking Benchmarking Database. 1 Defined as 8 percent of Basel II RWA. in loan losses, which are quite common when recessions reducing unproductive sales resources were all themes hit small business. However, some segments in hard-hit in 2009. countries have seen losses that exceed 1,000 basis points, driving them into the red. The Mid-Cap Segment (Serving Clients with More Than $25 Million to $250 Million in Annual Sales Rev- The Small-Cap Segment (Serving Clients with $2 Mil- enue). Mid-cap business units can get caught in between lion to $25 Million in Annual Sales Revenue). The tale the inherent profitability of the small-cap transaction- is similar in the small-cap space, where transaction cham- dominant business and the fee-rich large-cap space. They pion models have proven highly resilient during the crisis. have had less generous pricing and smaller deposit vol- It is especially critical to manage small-cap costs and pro- umes (compared with loans) than small-cap units. At the ductivity in a disciplined way in both the RM organiza- same time, they have seen smaller margin increases than tion and the back office. Cost cutting has been a priority large-cap units, while suffering higher loan losses and in the small-cap segment, with many of our survey par- lower revenues from investment banking and risk man- ticipants reporting cost reductions in absolute terms de- agement products. Mid-cap business units also face the spite growing revenues. Redirecting small-business clients challenge of clients demanding relatively large loans into branch channels, streamlining credit processes, and when the data and analytics on these companies can C O
- 16. sometimes be sparse. So while mid-cap units have enjoyed Large-cap bankers have also succeeded in increasing sales margin and volume improvements overall, it has been of investment banking and risk management products, quite difficult to create value in this segment during the with half of our participants increasing revenues in these crisis. areas by more than 20 percent annually from 2007 through 2009. The Large-Cap Segment (Serving Clients with More Than $250 Million in Annual Sales Revenue). The Differences Within Segments. Despite these general large-cap segment has been the toughest environment trends, it is worth noting that within each segment there overall in which to create value. However, the perfor- were wide differences in performance among individual mance gap between typical large- and mid-cap units has banks in 2009. (See Exhibit 4.) These differences were narrowed during the crisis. This is due to a relatively large more pronounced than in previous surveys because the increase in credit margins in the large-cap segment. A key crisis has more sharply divided top from bottom perform- factor is the fact that these lenders in many cases had ex- ers. Moreover, these variations were not the result of dif- tremely low lending margins before the crisis. Some ex- ferent economic conditions in different countries. We ecutives we interviewed even described these thin mar- found multiple cases of business units in the same seg- gins as “irrational.” ment and country with return on regulatory capital dif- ferences exceeding 20 percentage points. In our 2007 survey, multiple business units had total cred- it revenue per risk-weighted asset (RWA) well below 100 Regional Views. Important variations also emerged basis points, a level inconsistent with value creation on a among regions. In Western Europe, for example, revenue standalone basis. In this year’s survey, many large-cap growth partly cushioned the blow of rising loan losses, at participants reported margin increases since 2007 of this least for some banks. By contrast, our discussions with amount or even more, effectively doubling their lending corporate banking executives revealed widespread wor- margins. ries about macroeconomic stability and a possible dou- Exhibit 4. There Were Wide Variations in Performance Within Segments in 2009 Return on regulatory capital for top-, average-, and bottom-performing business units by segment, 2009 Average pretax return on regulatory capital (%)1 120 115 100 80 60 44 41 40 –25 33 20 –8 –6 0 0 –7 –20 –17 –15 –24 –40 Bottom three Top three Bottom three Top three Bottom three Top three Bottom three Top three Micro Small-cap Mid-cap Large-cap Average 2007 Average 2009 Source: BCG Global Corporate-Banking Benchmarking Database. 1 Defined as 8 percent of Basel II RWA. T B C G
- 17. ble-dip recession. Some banks in Western Europe suf- The Asia-Pacific region, in general, was relatively shel- fered particularly severe loan losses from excessive tered from the crisis despite the exposure of many com- exposure to sectors like real estate or shipping, or too panies (and their banks) to trade with Europe and the much concentration in hard-hit markets like Spain. United States. IMF data suggest that overall economic growth in the region—excluding Japan, Taiwan, Singa- In Central and Eastern Europe, banks also saw revenue pore, Hong Kong, and South Korea—did not dip below 6 growth of 15 percent or more, on average. Yet severe loan percent from 2007 through 2009. losses had a crippling effect on many busi- ness units, jumping by more than 250 ba- Observers continue to monitor issues re- sis points of RWA at multiple players from Many corporate banks lating to macroeconomic stability in some 2007 through 2009. have not properly countries in the region, and specific sec- tors (especially export-dependent compa- factored risk into their In the United States, the speed and sever- nies) may pose loan-loss challenges to ity of loan losses, especially in commercial pricing. banks. But the growth outlook in Asia- Pa- real estate, were a surprise to many. Some cific remains relatively optimistic. Our in- banks suffered losses in 2009 that wiped terviews with executives at both local and out their pretax profits of the previous several years or international banks in the region confirm that many in- more. We also found that U.S. banks with highly sophisti- stitutions are once again looking for growth. cated product offerings across cash management and oth- er fee-based products weathered the storm better, while smaller banks that were more dependent on both lend- The Lessons of the Crisis ing and deposit-spread revenue suffered. How successful these stronger banks will be at picking up strategic rela- Aer reviewing the experiences of top performers during tionships from damaged rivals will be a key issue going the crisis and speaking with senior corporate-banking ex- forward. ecutives, BCG has identified a number of axioms that banks would do well to remember. Meanwhile, Canadian banks and their Australian coun- terparts came through the crisis in excellent condition. The first is to always keep risk at the top of the agenda. Cor- Some posted margin increases of over 100 basis points, porate banks should fully factor risk, as well as liquidity with loan losses staying below 25 basis points. Their suc- and capital management, into their long-term strategies, cess was partly due to relatively strong national econo- operational planning, and day-to-day management. This mies, but other factors—such as a sustained focus on the fundamental rule was neglected by many of the lowest- core commercial-banking business (instead of driving for performing corporate banks. growth in riskier sectors) and conservative risk-manage- ment practices—suggest that choices by senior manage- Indeed, too many bankers focused on revenue and ment also played a major role. market share—not factoring in the “real” costs of risk, liquidity, and capital—when making lending and pricing In Latin America—particularly in the region’s leading decisions. Our 2008 corporate-banking report noted that market, Brazil—the outlook for corporate banking is from 2005 through 2007, at what turned out to be the quite favorable. Aer facing sizable loan losses and re- peak of a very positive run of economic growth, only duced liquidity, Brazilian corporate banks are aggressive- about half of corporate banks were generating positive ly returning to loan growth. Most key players are focusing (and rising ) economic profit. The economic climate hid their efforts on the mid-cap segment. Capital markets the fact that the revenue growth of many banks was the should develop in line with Brazil’s generally favorable result of more loans to relatively risky clients. Seen today macroeconomic outlook, offering investment banking op- through a prism of realistic liquidity premiums, risk costs, portunities. Transaction banking will continue to play an and capital charges, it is clear that many of these deals de- extremely important role, leveraging the sophistication stroyed value. Generally speaking, many corporate banks and innovative electronic capabilities of the Brazilian have not properly factored risk into their pricing. (See Ex- payments system. hibit 5.) C O
- 18. A second lesson is that corporate banks should manage entrenched local banks that have superior market knowl- their businesses like a portfolio, with an “over the cycle” edge and a less urgent need to quickly acquire clients to point of view. Businesses such as commercial real estate cover the costs of a newly expanded sales force. This is a and equipment finance can be profitable, but banks must lesson that banks must keep in mind as they consider be disciplined enough to monitor the growth of such busi- how to take advantage of the rapid growth in corporate nesses, especially during “good” years. It is also critical banking in rapidly developing economies. not to let one or two sectors that appear to be highly lu- crative grow too large in the portfolio. A collapse in these Finally, and most important in the long run, corporate areas can create painful loan losses as well as eliminate banks must cultivate deep client relationships. A salient a significant portion of the bank’s overall revenue point, one that some institutions have had to learn the stream. hard way during the crisis, is that reputational risk is real. For example, selling clients inappropriate financial instru- International or “out of footprint” expansion provides an- ments can result not only in costly litigation but also in other lesson: corporate banks must be extra cautious outside long-term damage to a bank’s franchise. Somewhat less their home markets. It has always been extremely difficult severe damage can result from cutting credit lines with to leverage a successful business model in one country long-standing clients or dramatically raising margins. into a new environment. Credit-led expansion, in particu- lar, can be dangerous, especially if competitors have ei- Our research with corporate banking clients indicates ther superior knowledge of client risks or better capabili- that many are reviewing their banking relationships, ties in valuing and managing collateral. It is all too easy seeking to “diversify their portfolio” with multiple banks. for a new entrant to end up with the clients rejected by Clients are also more conscious of the need to choose Exhibit 5. Many Corporate Banks Have Not Properly Factored Risk into Their Pricing Comparable mid-caps: relative credit-revenue performance, 2007, versus loan-loss deterioration, 2007–2009 Change in actual losses per RWA, 2007–2009 (basis points) –100 –80 –60 –40 –20 0 20 40 60 80 100 120 0 –20 –40 Banks with the lowest pricing have faced the biggest deterioration in –60 loan losses –80 –100 –120 Average –140 Total credit revenue per loan volume relative to average, 2007 (basis points) Source: BCG Corporate-Banking Benchmarking Database. T B C G
- 19. banks with strong balance sheets and reputations in or- will also be affected by rule changes related to counter- der to avoid becoming collateral damage in a bank’s next party risk). Loan classes with sporadic heavy losses, such liquidity crunch. Of course, corporate banking clients are as those to large corporations, may also be severely af- also more aware of the liquidity and risk challenges that fected. banks face. Many understand that banks extending cred- it need to cross-sell to be viable, and that the low lending Higher capitalization requirements will result in scarcer rates of 2006 are not likely to return. Whether this new and therefore more expensive capital. Not only will cor- understanding withstands a return to more porate banks have to compete with sister normal economic-growth conditions, or cli- business units for capital, but higher hur- ents and their banks return to the heady The regulatory dle rates at many banks will mean that precrisis mindset of low margins and high response to the crisis corporate units will have to work harder risk tolerances, remains to be seen. to generate economic profit from their remains a work in client bases. progress. The New-Normal Regulatory Leverage requirements, depending on Environment how they are structured, will have an im- pact on high-leverage businesses such as real estate and The regulatory response to the crisis remains a work in government finance, as well as on contingent liabilities progress. But it is virtually certain that a climate of great- and undrawn credit lines. The impact on products such er conservatism and risk avoidance will prevail and that as asset-based lending and small-business loans guaran- new regulations will have a material impact on the cor- teed by governments, where regulations may not fully porate banking industry. Reporting requirements will be- recognize the low-risk nature of the lending, will also come increasingly onerous—placing another burden on have to be carefully watched. finance and risk analysts serving the corporate banking business unit, as well as on frontline sales staff. Rules on liquidity risk will make transaction banking and its pools of deposits attractive, although details on the The regulatory agenda covers a vast array of highly com- treatment of “sticky” core corporate deposits will have an plex and interrelated issues. They range, for example, effect on internal transfer pricing and therefore on trans- from Basel III topics such as redesigned rules on RWA action banking economics. methodology, capital adequacy, leverage ratios, and li- quidity risk, to areas such as “financial crisis responsibil- Finally, new central counterparty rules may have an im- ity fees,” inappropriate incentives, and central counter- pact on sales of derivatives to mid- and large-cap business party requirements for derivatives. units. Capital requirements for standard products should decline, but corporate banks will also face greater pricing It will be critical for corporate banking executives to mon- transparency and potential disintermediation from elec- itor developments and ensure that their banks retain the tronic platforms. Customized products—which will likely flexibility to respond to regulatory changes as they be- face significantly higher capital requirements—will be- come finalized. In the coming months, bankers will need come much more costly to provide. to think two moves ahead to be ready for possible actions by regulators. Overall, upcoming regulatory changes are sure to increase the cost of providing financial services to corporate cli- More specifically, there are four interconnected factors ents. It remains to be seen which banks will be most suc- whose regulation will significantly affect corporate bank- cessful at passing these extra costs on to their clients. Do- ing: risk measurement (including RWA), capitalization, le- ing so will require rigorous data and analytics to verage ratio, and liquidity risk. The impact of changes in incorporate true risk, liquidity, and capital costs into prod- these areas will vary by product and segment. uct pricing. It will also require strong sales and communi- cations skills with clients, and discipline in competing New RWA definitions will hit RWA-intensive products with banks that continue to price below their true cost hard, including client-driven trading businesses (which levels. C O
- 20. The Blue-Chip Corporate Bank How Top Institutions Are Positioning Themselves to Win S trong economic growth and low loan losses al- Building Premium Client Relationships lowed many corporate banks to post strong profits in the years leading up to the crisis. But Banks that outperformed both before and during the cri- the gap between top and bottom performers sis tend to share three characteristics in their distribution from 2007 through 2009 was extremely wide. models. Given the megatrends in play and the new-normal eco- nomic and regulatory environments, we expect this gap First, their overall philosophy is driven by the develop- not to narrow but to increase in the coming years. BCG’s ment of deep client relationships as opposed to a focus benchmarking data show that the gap between top and on sales at any cost. Their sales capabilities are still very bottom performers is so large that even a period of lower high, but they place a premium on understanding the cli- loan losses and recovering economic growth would not ent and the client’s industry and providing superior ser- allow low-performing banks to come close to the top per- vice, expert advice, and solutions that help the client suc- formers in terms of overall profitability. ceed. At a limited number of banks, we are seeing top performers put a much greater emphasis on the corpo- Indeed, in our view, the postcrisis era will witness the rate “client experience”—defining what the target client emergence of the blue-chip corporate bank. Such banks experience is, training their RMs and client service teams will be the jewels in the portfolios of leading universal fi- on how to deliver it, and tracking client perceptions of nancial institutions. They will generate steady long-term how RMs and client service teams are succeeding. profit growth thanks to superior business models, excel- lent risk-management capabilities, and an overall ap- Blue-chip banks also possess the analytics capability to proach that focuses on building a value-creating corpo- identify those client clusters with the highest long-term rate-banking franchise. By this we mean a balanced profit potential. Such banks have the richest mix of sta- business that focuses on deep and profitable client rela- ble, fee-based cash-management services, enabling the tionships rather than growth in burgeoning (but risky) credit needed for the relationship to be provided on a products or sectors. Blue-chip banks will show greater dis- sustainable, risk-adjusted basis. Analytical insights can cipline in responding to economic recovery, while their be used both by senior managers for strategic planning bottom-quartile competitors may well return to aggres- and by individual RMs or client service teams to better sive deal making. Already in the first quarter of 2010 we understand their clients’ needs and revenue potential. saw falling lending margins as well as easier and longer loan terms in some markets, trends that are reminiscent Finally, blue-chip banks have rigorous relationship-man- of 2006 and the circumstances that preceded the crisis. agement, sales, and service processes. These feature struc- tured and standardized client-planning methods, strong In the course of our case work and benchmarking efforts, teaming with product specialists, intense performance re- we have identified five core priorities of the blue-chip cor- views and coaching, and transparent data about sales porate bank that leading institutions are already embrac- pipelines and client service team performance. A few top ing for the postcrisis era. Let’s examine each one. banks have also implemented structured client feedback T B C G
- 21. to ensure that RMs and client service teams are not just rapidly growing markets constituted proof that their risk- selling to clients but also bringing them the full relation- management practices were adequate. There was oen a ship value of the bank. The result of this approach is a su- misplaced confidence that the boom would continue in- perior client experience that generates loyalty—which, in definitely, as well as a glaring lack of expertise concerning turn, translates into deep wallet penetration of the most corporate-lending risk assessment, liquidity pricing, the attractive clients in each segment. transfer of funding costs, and monitoring mechanisms needed to identify failing loans early. Creating a Culture of Risk Blue-chip players create a culture of risk Awareness and Accountability The risk function awareness and accountability at every lev- needs to get el. The first line of defense lies with the As the financial crisis has evolved, atten- front office—as opposed to having the out of its tion has shied from banks’ initial losses front office push on the accelerator when in subprime and related securities to more ghetto. the risk department tries to step on the traditional asset classes, including corpo- brakes. The overall risk-management func- rate loans, commercial real estate, and tion regarding standards, infrastructure, specialty finance activities that bolstered revenue growth and methodologies is centralized, but every individual in during the boom years. Many banks in Europe and the every department is held responsible for any activity that United States, for example, focused on fast-growing com- involves risk. mercial-real-estate markets instead of “bread and butter” corporate-client relationships, sometimes ending up with In our conversations with blue-chip banking executives, greater exposure to commercial real estate than to all of one of the most common words used was discipline. These their core clients combined. banks are prepared to lose market share rather than slash margins or end up with an unbalanced portfolio of assets During the crisis, some banks’ transformation from as- and businesses. Before the crisis, executives at more than sumed profitability to a state of extreme distress was rap- one high-performing bank told us about deals they had id and stunning. Moreover, banks that were already show- le to more aggressive international banks or commercial ing high exposure to bad loans tended to get hit the financing companies because they thought the risk-ad- hardest. Even worse, the banks with the riskiest portfolios justed pricing was too low. Now, having navigated the cri- did not end up being compensated for that risk by suffi- sis with strong financial performance, these blue-chip cient additional revenue. banks are using their balance sheets to grow—maintain- ing their discipline—while less careful banks retrench. The revelation to the market—and to the banking indus- try itself, to some degree—was that precious few financial Overall, to build a strong risk culture, there are five basic institutions had a true awareness of the need for rigorous measures that corporate banks can take. risk management. In fact, practices that oen paid off handsomely in the short term—such as pushing large Maintain the strong independence of risk control loans to large corporate clients, concentrating on con- functions. The risk function needs to get out of its ghet- struction and other real-estate loans, and competing on to. What’s needed is a culture of true risk management— loan margins—fostered a culture of daring in which those not just risk reporting and upward delegation. Risk man- who threw caution to the wind were seen as great sales agers must be properly compensated and recognized and people rather than as reckless. 3 their independence from the front office guaranteed. They must also be encouraged to be proactive. As one Moreover, chief risk officers at many banks did not have risk specialist observed, “Risk functions need to go look- sufficient levers to influence credit allocation and pricing ing for trouble rather than waiting for trouble to find decisions. Compensation schemes were too closely linked them.” to top-line performance only, with no adjustments for risk, liquidity, capital, and operating costs. Many banks 3. See Risk and Reward: What Banks Should Do About Evolving Finan- mistakenly believed that their strong performance amid cial Regulations, BCG White Paper, March 2010. C O
- 22. Ensure senior-management competence in risk man- kets—and high profitability over the economic cycle. Pre- agement. Those banks that have best weathered the cur- vious BCG corporate-banking reports have documented rent crisis typically possess a wealth of accumulated ex- the tendency of transaction champion models to outper- perience in risk management across sales, product form. This finding has held true during the crisis. (See Ex- development, and general management functions. They hibit 6). Moreover, our benchmarking revealed stark dif- also tend to set aside time for thoughtful consideration of ferences among competitors in areas such as deposit risk trends and scenarios, with a premium placed on busi- volume generation, revenue generation, and client pene- ness judgment rather than having the risk tration of transaction banking products. analysts slice and dice the risk data into (See Exhibit 7.) lengthy and complex reports that go un- Even deals with read. prestige clients To win at transaction banking in the post- crisis era, institutions will certainly need must be openly Adopt incentives that take risk manage- solid product capabilities—but even more ment performance into account. The scrutinized. important is a true sales and service men- key issue is not bonus levels alone but the tality. They will also need effective deliv- need to explicitly link bonuses to risk-ad- ery and operating models. justed performance over a sufficient period of time. Some banks rewarded RMs purely on the basis of loan volumes Blue-chip corporate banks will improve their capabilities and revenues rather than long-term economic profit. by moving beyond traditional product-centric cultures to more solution-oriented ones. A prime element of this Encourage healthy debate. Deals, especially the most transition is the gradual building of financial-supply- complex ones, must be discussed in depth. Even deals chain offerings that provide an integrated set of services with prestige clients brought in by top-performing ranging from new products (such as e-invoicing) and val- RMs must be openly scrutinized. The role of risk com- ue adds (such as working-capital optimization and li- mittees in fostering such discussions is essential, as is the quidity management) to traditional payment services. role of senior risk specialists. The latter are critical to Products will span the supply chain, serving both sides productive thought partnering with sales and other ex- of the transaction—as illustrated by financing based on ecutives. Banks whose risk analysts are junior staff lim- the buyer’s credit rating that actually finances the buy- ited to generating reports not only are missing a signifi- er’s supplier. cant opportunity but are putting the organization at undue risk. Moreover, leading corporate banks will strengthen their online-access capabilities. Larger clients will increasingly Improve risk data and analytics. Banks must invest to access their bank’s services through their own enterprise- improve their data gathering, reporting, and analytics on resource-planning systems, allowing for far greater func- their clients. Outside observers are oen startled to learn tionality and the deepening of relationships at the same that some well-known corporate banks struggle to com- time. Smaller companies will use e-portals that offer pile holistic relationship risk data on major clients, to banking clients quick and easy access to a broad array of match risk department data with finance department products and services, free up human resources for more data on loans, or to quickly identify deteriorating loans value-added activities, reduce errors, and improve the cli- for handling by their special loans groups. ent experience. E-portals not only migrate transaction volume from cost- Enhancing Transaction Banking ly branch and call-center channels but also enable what Capabilities we call customer-initiated cross-selling. A client using an e- portal finds it easy to access added functionality—for ex- The crisis has highlighted the attractiveness of transaction ample, to lock in a forward exchange rate or sign up for a banking. It is a business that can provide reliable (and cash-flow forecasting service. And as clients become more growing) fee and spread revenues, rich deposit volumes— dependent on their banks’ online products and services, critical to reducing reliance on wholesale funding mar- they will find it much more onerous to change their bank- T B C G
- 23. Exhibit 6. Transaction Champions Tend to Outperform, Even in a Climate of Depressed Deposit-Interest Margins Mid-cap revenue mix, 2009 % 2 2 100 Transaction volumes down 8 14 in 2009 versus 2007 3 80 Deposit margins down 33 60 87 40 Loan interest margins up but loan losses also up 51 20 0 Transaction champions Credit-heavy traditionalists Revenue per RWA (basis points) 605 249 Return on regulatory capital (%)1 31 8 Crisis impact since 2007 ROE up for most ROE down for all Investment banking, risk management, and asset management products Transaction fees Deposit interest income Loan interest and fees Source: BCG Global Corporate-Banking Benchmarking Database. 1 Based on the worst three-year average of actual or expected loan losses. Exhibit 7. In Transaction Banking, There Are Major Performance Gaps Between Competitors Mid-cap peer group: key transaction-banking performance drivers Deposit volume generation Revenue generation Client penetration Transaction fees plus deposit Percentage of clients Deposit-to-loan interest income/deposit volume using transaction ratio (%) (basis points) banking services 80 220 100 200 180 80 30 percentage 60 points 160 2.5X (9X fees) 140 60 4X 120 40 100 80 Transaction 40 fees 20 60 40 Deposit 20 interest 20 income 0 0 0 Top three Bottom three Top three Bottom three Top three Bottom three Source: BCG Corporate-Banking Benchmarking Database. C O
- 24. ing relationship. But building a superior e-portal and cost- teams and strategy discussions, so that there is positive efficient back-end systems requires significant, continu- feedback between strategy formulation and what is (and ous investment. is not) possible on the IT and operations fronts. Finally, to state the obvious, developing a winning A key element of this interaction is oen the articulation transaction-banking value proposition for clients is not of a shared target operating model, based on a clear and easy. It requires a long-term commitment to building quantified view of the desired client experience for the product platforms, optimizing operational relevant client segment. This experience processes, and embedding the concept of must be linked to the bank’s business the balanced product suite in the sales Building a superior strategy—whether it is trying to be, for ex- force. In addition, it is worth stressing that e-portal requires ample, an “easy and convenient” transac- merely developing product capabilities is tion bank for small businesses or a “fast significant, continuing not enough—the sales force must be fully and flexible lender” for larger clients with engaged and capable of selling the prod- investment. more sophisticated needs. ucts to clients. Banks that focused on these elements of their business before Specific initiatives may vary by segment, the crisis are now enjoying the dividends, generating the product, and bank, but they generally have common profits needed for further investment to make it even themes, such as the following: more difficult for latecomers to attack the market effec- tively. ◊ Reducing redundant tasks and related errors that af- fect the customer experience, particularly in cash man- agement and lending processes Forging the Next-Generation Operating Model ◊ Moving operational work to central contact centers or online platforms to allow the sales force to concentrate Now more than ever, corporate banks need to overcome on selling products and managing relationships the old-fashioned view that theirs is a purely “face to face” business, requiring minimal investment in process ◊ Improving data capture and quality, as well as analyt- and technology. We have seen seriously outdated legacy ics, in order to improve client insight IT systems at some major institutions. In order to win in the postcrisis era, corporate banks need to be proactive ◊ Simplifying, standardizing, and automating core proc- about remodeling their business processes and IT archi- esses as much as possible (which requires careful con- tecture. sideration of what should be standard and what should be customized when it can add value for clients) The difficulty is that corporate banking back offices are oen small compared with their retail-banking equiva- ◊ Leveraging scale in operational activities and enabling lents and can take longer to recover significant one-time significant cost reduction IT investments, resulting in more challenging project eco- nomics. Consequently, corporate banking divisions some- ◊ Capturing cross-border opportunities in order to build times get short shri when IT and reengineering invest- scale and seek lower factor costs (such as by offshoring ments are decided each year. or creating multicountry product factories) Blue-chip corporate banks take a long-term view of the In the course of our client work, we have seen some lead- critical operations and IT enablers that support their suc- ing corporate banks develop product factories where op- cess. They continually implement projects to enhance ef- erations and IT platforms serve customers in multiple fectiveness and efficiency, taking a holistic “end to end” countries. We have also witnessed the evolution of lean perspective on their operating model, from the client credit processes that segment loans according to their through the sales force to the back office. They also in- complexity. This allows applications to be handled more volve IT and operations specialists in their management efficiently through clean, quick, risk-appropriate decision T B C G
- 25. processes, appropriately differentiated according to small- for loan applications, and costs per transaction in cash cap, mid-cap, and more complex loans. management. Overall, next-generation operating models will need to However, the benefits of end-to-end transparency are sig- fulfill broader sets of requirements than in the past, ad- nificant. Banks with strong capabilities in tracking and dressing not only costs along the value chain but also cus- reporting on a segment-specific basis across revenue, tomer satisfaction and perception. The customer view on costs, loan volume, RWA, and economic capital—as well operational excellence will increasingly be a key driver of as in tracking and reporting client, product, and sales banks’ profitability levels. force data—tend to significantly outperform banks with weaker capabilities. (See Exhibit 8.) Developing End-to-End Transparency Blue-chip corporate banks, where the mantra is oen and a High-Performance Organization “what gets measured gets done,” are moving in this direc- tion. We believe that the ongoing improvements in cheap- Many corporate banks claim to be working on initiatives er computing power and the constant availability of elec- such as those discussed above. But corporate banking is tronic data are bringing the industry to a tipping point a highly complex business. It is no cakewalk to accom- where leading banks will transform how they are man- plish true change across organizational boundaries or aged. Consider the following questions, which many cor- along the value chain. Nor is it easy to build the underly- porate banks have difficulty answering, but which are in- ing data and analytics capability or to attract the sales creasingly discussed at leading banks: and managerial talent required to make a large, extreme- ly complicated system hum along efficiently. Exhibit 8. Performance Is Strongly Linked to the Quality and Transparency of Data In our experience, two key attributes drive the ability of and Reporting high-performing banks to tie these complex elements to- gether into a powerful corporate-banking business mod- All participants, 2009 el: end-to-end transparency and a high-performance or- Average return ganization. on regulatory 1 capital (%) End-to-End Transparency. Given the amount of data 30 tracking and monitoring that goes on in banks, it may sur- prise those in other domains that corporate banks oen 25 struggle to measure the true profitability of individual cli- ents. Even views by product, channel, or region can be dif- 20 12 percentage points ficult to obtain. Indeed, although it is relatively easy to track overall loan volumes, revenues, and accounting prof- 15 it, some banks continue to struggle with primitive liquidi- ty-pricing methodologies and inaccurate cost allocations. 10 It is a tall challenge to achieve the highly granular knowl- edge of the risk and capital requirements of different prod- 5 ucts and clients that is needed to arrive at an accurate cal- culation of economic profit, or to gather and maintain the 0 multiyear data needed to assess trends in client profitabil- Transparency leaders Weaker performers ity, client experience, or RM productivity. ◊ High levels of transpar- ◊ Significant gaps in such ency on revenue, cost, areas as economic risk, liquidity, and capital, deposit interest Furthermore, on an operational basis, our case work capital income, RWA, and client data shows that many banks find it daunting to produce the Source: BCG Global Corporate-Banking Benchmarking Database. critical management metrics needed to track, for exam- 1 Defined as 8 percent of Basel II RWA. ple, their own sales-force productivity, turnaround times C O