Opportunities for Action in Financial Services Growing Profits Under Pressure: Integrating Corporate and Investment Banking
Growing Profits Under Pressure: Integrating Corporate and Investment Banking As the effects of the economic downturn continue to erode corporate profits, large commercial banks both global and regional face growing pressures on their corporate- and investment-banking businesses. These pressures are both external and internal. From the outside, commercial banks confront increasing competition particularly from global investment banks that are finding it tougher to close deals and thus are competing more vigorously for commercial banks traditional corporate transactions. In addition, commercial banks are finding that their corporate clients are increasingly becoming their rivals. Indeed, companies today have greater financial expertise than ever before: they meet more of their own banking needs themselves and place greater demands on their banks for service and products. Banks also face the enemy within. Despite efforts by commercial banks to slash expenses, their heavy cost structures bloated during the heady economic years continue to restrain profitability. To make matters worse, the poor financial climate is forcing institutions to set aside high loss provisions on credit portfolios. In recent years, many commercial banks have acquired investment banks, hoping to gain access to new clients and to expertise in high-margin products. But integrating these acquisitions has proved difficult. Investment-banking revenues have suffered over the past two years with the decline in mergers and acquisitions, equity capital markets, and trading activities. All too often, costs have continued to rise.
Large commercial banks need to rethink their approaches to serving corporate clients in order to meet customer needs and build profitability more effectively. For many, it now makes clear sense to integrate their corporate- and investment-banking businesses to exploit untapped sources of revenue particularly in their local corporate-client base. Such integration can help them cut costs, improve customer service and efficiency, and realign the costs of their investment-banking offerings with their clients revenue potential. Large corporate clients are heavy consumers of corporate-banking products (such as loans, deposits, and specialized financings) and investment-banking products (such as equity and debt products from capital markets). As a result, commercial banks that consistently cross-sell both corporate- and investmentbanking products are more profitable than those that do not. Indeed, such cross-selling is a prerequisite for achieving returns on equity of more than 20 percent on the business that banks do with multinationals and large companies. Institutions that have an integrated view of the client relationship across all financial products can focus their more attractive pricing strategies on clients that offer the best commercial prospects. A Coordinated Approach to Clients Our experience shows that by combining corporateand investment-banking divisions, commercial banks can increase their pretax profits for these businesses by as much as 50 percent over two years. This improvement comes from three sources. First, the combined bank can sell more products to its corporate customers; it can also help strengthen weak links between product groups while improving the coordi-
nation of marketing and execution between advisory and product groups. Second, there are opportunities to cut costs directly in corporate- and investmentbanking divisions. Third, substantial cost savings accrue from integrating corporate- and investmentbanking divisions and removing duplication. On its own, the global corporate-banking market is growing slowly. (See the exhibit Business Grows Slowly with Profits Under Pressure. ) When the divisions are separate, corporate bankers look after relationships with corporate clients while investment bankers who focus more on transactions marshal the products those clients need. But with an integrated bank, the institution can ensure that it approaches and serves its corporate clients in a more coordinated manner. It can target individual customers effectively with the right product mix, including high-margin investment-banking products. In addition, capital allocation for individual clients becomes more efficient. Such efficiency is increasingly important when lending margins are tight and lending is strategic to securing the sale of highmargin investment-banking products. Moreover, an integrated corporate and investment bank requires just one profit-and-loss (P&L) account across all products for each corporate customer and only one clientrelationship manager responsible for each account. Several large commercial banks with investmentbanking divisions are either adopting or considering such an approach. Their approaches vary depending on the types of companies they serve. In some cases, for example, the integrated corporate and investment bank is actually divided in two: one part serves multinational and large corporate customers while the other serves midsize companies. Other players have adopted an integration model covering their entire corporate-customer franchise.
How to Mesh for Success The integration of corporate- and investment-banking units requires major strategic adjustments. The following actions can lead to a successful outcome: Pinpoint your most profitable products. Using customer analysis and segmentation, commercial banks must redefine their target customers and strategic product mix to cover the different categories of corporate- and investment-banking offerings. They should accurately assess the competitiveness of the different investment-banking products. These instruments are the key drivers of client profitability, especially in relationships with large and multinational companies. For example, many banks will find that mergers and acquisitions and equity capital markets have high-revenue potential but that their product capabilities are not competitive when compared with those of global players. Business Grows Slowly with Profits Under Pressure Global Corporate-Banking Market 1 Revenues Profits U.S.$billions CAGR 2 (%) U.S.$billions CAGR (%) 2.5 1.6 6 295 48 2.9 3.1 333 56 7 2 49 16 9.2 0.8 53 15 3 241 2.3 270 31 2.1 35 2000 2005 2000 2005 Asset management 3 Investment banking Commercial banking SOURCES: BCG analysis and estimates. 1 Includes only corporate clients with yearly revenues above $5 million in Europe, Asia (Japan, Australia, New Zealand, and Singapore), and the United States. 2 Compound annual growth rate. 3 Limited to externally managed assets of corporate customers.
Establish cohesive client-coverage models. Client relationship managers should be responsible for a customer s P&L account across all investment- and corporate-banking products. There should be just one joint P&L account so that relationship managers will be motivated to fulfill product budgets for as many products as possible. Competitors should set up bankwide client-service teams that can draw on the expertise and resources of all the relevant product areas, including investment banking and credit. Align the incentive system correctly. This is a huge challenge in integrating an organization, where there are often many levels of compensation for similar functions. It is critical for incentives to be aligned with the firm s most promising products. Monitor client profitability regularly. Schedule clientcommittee meetings that include the bank s top management to monitor product budgets and the capital needs of the integrated bank s various parts. It is also important to develop a segmented product-delivery mechanism in which the bank s product mix, distribution channels, and cost base are aligned with clients revenue potential and profitability. Establish an integrated process for managing the credit portfolio and allocating capital. Senior managers at the corporate center should set prices on the basis of credit and liquidity risk and be responsible for syndication, securitization, and asset trading in order to manage the P&L and capital consumption of the credit portfolio. Ensure consistent backing and involvement from senior executives at the top of the company. Top management needs to drive the integration effort relentlessly if it is to succeed. Given that corporate and investment bankers often have different cultures
and backgrounds, such involvement is particularly important to creating respect, trust, and team spirit in the integrated group. It is also important to communicating and selling the strategy to the bank s clients. Commercial banks that want to prosper in today s competitive financial-services markets should integrate their approaches to corporate- and investmentbanking markets in order to bring down costs and improve efficiency. In so doing, they should ensure that their client-coverage models are well integrated and that they closely match their clients needs. Such a coordinated approach recognizes that in today s tough times, corporate clients are one of the strongest assets that many big banks possess. It pays to foster that client base by combining the relationship skills of corporate banks and the product expertise of investment banks. Ludger Kübel-Sorger Jürgen E. Schwarz Svilen Ivanov Ludger Kübel-Sorger and Jürgen E. Schwarz are vice presidents in the Frankfurt office of The Boston Consulting Group. Svilen Ivanov is a vice president in the firm s New York office. You may contact the authors by email at: kuebel-sorger.ludger@bcg.com schwarz.juergen@bcg.com ivanov.svilen@bcg.com The Boston Consulting Group, Inc. 2002. All rights reserved.
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