The performance outlook for the corporate and investment banking (CIB) sector has been positive on aggregate. In 2022, CIB organizations generated $2.9 trillion of revenue and achieved an RoE of about 12 percent at a 54 percent cost-to-income ratio. In doing so, the industry covered its cost of equity after a decade of restructuring following the global financial crisis and more recent pandemic-driven volatility.
However, these average figures mask wide variations in performance, with a spread of 700 basis points or more in ROE between the top and bottom performers in any given segment (Exhibit 1). This variation prompts questions from boards, investors, and regulators—questions made more pointed by the increasing shift of value to nonbanks in direct lending, market making, and wholesale payments.
This variation also reflects the underlying complexity of the industry. The unique nature of each organization—in terms of specific clients served, the particular mix of products, the precise geographic footprint, and responses to date to the nonbank threat—means that each should be thought of as a segment of one.
In how they approach value creation, each CIB organization must therefore disaggregate its businesses into highly granular underlying client and product franchises. This analysis inevitably reveals underlying pockets of excellence that even the most challenged franchises can use as a foundation for future plans, and that the leading franchises can build on to deliver the next wave of growth.
But as they develop those plans, all organizations will have to contend with five major shifts that are fundamentally transforming the environment in which they have operated for the past 15 to 20 years (Exhibit 2).
- Shift 1: A radically different macroeconomic environment. As a result of ongoing economic and geopolitical issues, CIB organizations will need to cope with at least three major changes. First, higher rates have changed lending dynamics—increasing profitability going forward but creating challenges in legacy portfolios (for example, commercial real estate). Second, there is a renewed focus on commercial deposits and on the liability side of the balance sheet. Third, deal, trading, and cross-border patterns have been fundamentally disrupted. CIBs can respond by developing new underwriting criteria and taking a disciplined approach to credit monitoring and workouts of legacy portfolios; building next-generation deposit gathering, pricing, and analytics capabilities; and repositioning affected businesses.
- Shift 2: A new, technology-led ‘art of the possible.’ New technologies have changed the ways in which CIB organizations can engage with their clients. Organizations can now offer a truly digitally enabled front office and take advantage of a new wave of generative AI use cases (Exhibit 3). To capitalize on these opportunities, CIB businesses can make targeted investments that will drive productivity tailored to their unique client and product franchises. They will need to pay particular attention to choosing the right gen AI use cases, building capabilities that can scale, and managing the associated risks.
- Shift 3: Changing regulatory and risk management environment. Factors such as the finalization of foundational capital regulation and higher interest rates have resulted in increased volatility and risk exposure for CIB portfolios. The right risk management practices can build institutional resilience and competitive advantage, as well as driving regulatory compliance. CIB organizations should focus on building awareness of—and preparing appropriately for—new capital regulations, treasury and liquidity regulations, counterparty credit risk, nonfinancial risk, climate risk, and gen AI.
- Shift 4: New market structures. Increased lending by private credit players and the rise of tokenized assets—a trend that is less established but could be equally disruptive—have significant implications for CIB organizations. CIB organizations looking to respond to the rise of direct lenders should consider revisiting their on-balance-sheet lending approach and taking advantage of off-balance-sheet partnerships and funds, while monitoring and managing the associated risks. CIB organizations that are attracted by the potential of digital assets and tokenization should build their understanding of these technologies before making selective bets, which might include building relationships within the existing ecosystem and participating in standard-setting efforts.
- Shift 5: Long-term trends in certain sectors and products. Many trillions of dollars will be needed to finance the net-zero transition,1 and CIB organizations are already beginning to take note, with the focus shifting from risk and compliance toward the broader commercial opportunities linked to financing the next wave of green businesses. There are also massive financial needs in other sectors, including infrastructure, energy, unfunded pension liabilities, and life sciences. To successfully pursue these opportunities, CIB organizations will need to focus on select areas where they can build the right product capabilities and serve clients end to end. Finally, CIB organizations are also becoming keenly aware of the substantial value embedded within cash management businesses and should consider reimagining their existing offerings or launching stand-alone attackers to unlock this potential.
CIB organizations will require new playbooks to successfully navigate these five major shifts. While these playbooks will vary by organization, each must outline the necessary actions to secure the near term, build foundational capabilities in the medium term, and make selective, decisive bets for the longer term.