The trading bonanza that has sustained revenues at the world’s biggest lenders during the Covid-19 pandemic could be replaced with a widespread shift towards the staid world of transaction banking as firms look to sustain elevated profits.
A sweeping new report from consultants Oliver Wyman and Morgan Stanley says that the boom over the past year at the world’s largest investment banks could be sustained over the next two years at least. The report suggests a return on equity across the corporate and investment banking sector of around 12%, in line with 2020 and above the profitability seen in the previous three years.
However, markets revenues — and fixed income trading in particular — was the driver of returns last year, the report suggests that transaction banking will become the “key battleground” for the world’s largest lenders. The sector offers payments and cash management services to large corporations, and is dominated by a select band of big lenders including Citigroup, Bank of America and JPMorgan.
The report suggests that by pushing into transaction banking, firms could capture an additional $400bn in revenues.
Transaction banking has emerged as an increasingly competitive sector in recent years, as traditional Wall Street banks have looked to expand beyond trading and investment banking. Goldman Sachs, in particular, has pinned growth opportunities on new business lines including credit cards and retail banking, but has also been pushing into transaction banking as part of its move to diversify its business.
Oliver Wyman and Morgan Stanley said that the boom during the pandemic showed that investors have “underestimated the resilience and countercyclical earnings power of markets and IBD franchises”. They added that revenues in these divisions would remain 10-11% above the levels seen before the Covid-19 crisis, as the surge in initial public offerings and so-called blank cheque companies could help sustain declining revenues elsewhere.
However, they cautioned that the pandemic has swung the market in favour of larger players. “In markets and IBD, the shift away from risk-intensive business models has increased the value of scale in liquidity provision and client service,” the report said.
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