Bain & Company Projects Imminent Crunch on Wholesale Banking, Suggests Climate Finance & AI as Future Revenue Drivers

According to a report from consultancy firm Bain & Company, wholesale bank revenue growth rates could drop fully three-quarters from recent levels to a compound annual growth rate of 2% by 2025, with the weakest projections showing revenues in the sector actually contracting, with a CAGR of 2%. In comparison, from 2019 to 2022, the wholesale banking sector experienced outsized revenue growth with a CAGR of 8% or more. To address this imminent crunch, Bain & Company is urging wholesale banks to seize new sources of growth, including climate finance and artificial intelligence deployment.

The crunch on the prospects for wholesale banks’ financial performance comes in the face of higher interest rates, which are set to remain persistently above the ultra-low levels of prior years — even if central banks reduce current benchmark policy rates ­— and a resulting adverse shift in financial conditions, according to Bain & Company. Adding to pressures on wholesale banks’ future financial performance are cost pressures from a critical need for heavy spending on IT investments to upgrade and modernize technology.

Bain’s proprietary research supports this weak expected outlook for wholesale bank revenues. In-depth interviews with approximately 30 CEOs and senior executives at large wholesale banks found that a majority (~52%) believe prospects for the industry are currently only “average” and that recessionary headwinds, especially in Europe, are expected to hit banks’ performance.

In addition, 76% of executives interviewed also believe that their existing technology organization does not deliver value for money for their institutions. With wholesale banks facing strong cost pressures from required heavy investments in IT alongside the likelihood of significantly weaker revenue growth, Bain’s new analysis maps out the case for wholesale banking institutions to capitalize on new and emerging sources of income to bolster growth and shore up returns.

“The macro-driven boom times fueled by ultra-cheap money are over,” Carsten Baumgartner, a partner in Bain & Company’s financial services practice, said. “Achieving further growth and sustained outperformance versus competitors will be more difficult in the future, but it is achievable for those wholesale banks which commit sufficient resources and make the essential, smart choices around AI, technology, talent and products that resonate and have impact in climate- and carbon-related markets that will be critical for the future.”

Leveraging New Sources of Growth and Revenues

Bain & Company’s study highlights major opportunities from climate-related financing and carbon markets and from leveraging advances in generative AI.

Climate finance and carbon markets represent lucrative sources of new potential revenues for wholesale banks, according to the report. Bain & Company estimates that climate-related products and services will offer a $1.4 trillion opportunity in annual incremental financing globally through 2030, with $550 billion of this addressable by wholesale banks. This could generate a $37 billion annual revenue poll, four-fifths of which would be set to flow from corporate lending. In addition, carbon credits represent an additional revenue opportunity.

Generative AI will fundamentally change wholesale banks’ business and operating model, according to the report, with 72% of executives expecting it to transform how their institutions do business. AI use cases cited range from developing insights for corporate clients on topics such as liquidity optimization to optimizing core processes, including automation of key steps in the lending process, to the management of regulatory demands. However, the scale of the unrealized opportunity around AI and its uses cases is underlined by only 24% of executives believing their organizations are geared up to unlock AI’s potential. Reasons for this vary from a shortage of AI expert talent to setting the right priorities for AI implementation.

In addition to the new sources of growth from AI and climate-related financing, Bain also points to other key opportunities that wholesale banks can harness, including adopting greater use of digital assets, modernizing core IT systems, and doing more to attract and motivate employees who have different priorities than in the past.

Effectively deploying powerful modern technology in core operations is critical to success, according to the report, which notes that applications such as cloud-native banking platforms and processes supported by AI can enable banks to automate complex and sophisticated tasks, reducing cost while providing real-time responses to customers.

At the same time, digital assets offer wholesale banks the scope to make still further activities more efficient, according to the report. Blockchain market infrastructure and the use of tokenization have the potential to transform the management of private assets, such as private equity funds, private debt and real estate, with more liquidity and automated settlements, the report said. Similarly, distributed ledger technology may make it possible for banks to eliminate costs from activities such as repetitive know-your-customer due diligence.

In the talent space, the report found that shifting employee expectations mean that for wholesale banks to regain ground they will need to overhaul their proposition to their teams and tap hidden pools of talent. Overall, gaining the right future talent is seen as a critical goal by the majority of the interviewed wholesale banking executives, who highlighted an urgent need to elevate this priority to be high on their management agendas, reflecting pressure to secure results in this area to ensure enhanced future performance.

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