The corporate and investment banking (CIB) sector is undergoing a significant transformation, marked by several major shifts including technological advancements in client engagement, changes in the regulatory and risk management environment, and new market structures, which are creating both opportunities and challenging for the industry, a report by global consultancy McKinsey and Company says.
The report, titled “Five big shifts shaping a new world for corporate and investment banks”, explores the state of the global CIB sector, delving into emerging trends in the industry and sharing key strategies CIBs can adopt to tackle the opportunities and challenges ahead.
According to the report, new technologies including intelligent process automation, machine learning (ML), advanced analytics, cloud adoption, and generative artificial intelligence (AI), are transforming operations in CIB and changing the ways in which organizations can engage with their clients.
Technological advancements are arising alongside a shift in consumer preference towards digital channels. Citing findings from a prior study, the report notes that 70% of CIB clients want to migrate all financial transactions to digital channels; 50% want to manage their short-term lending needs in a fully digital way; and 40% prefer remote interactions with relationship managers when discussing new products.
These trends and findings suggest that offering a truly digitally enabled front office has become crucial for CIBs, McKinsey says, urging organizations to invest strategically in technology and capabilities most closely tailored to their unique client and product franchises.
The potential of generative AI
One technology in particular that’s highlighted in the report is generative AI. Generative AI refers to a class of AI systems designed to generate new, original content autonomously. The technology can be applied across a broad range of use cases to automate routine tasks, improve efficiencies, and enhance recommendation engines and customer experiences.
McKinsey estimates that generative AI could improve productivity in core CIB activities by between 30% to 90% in individual use cases, potentially adding up to about 10% of CIB operating profits in the long run.
In CIB, the report notes that generative AI is mostly applied in three areas, citing new product development, client operations, and marketing and sales as the most prominent functions in which the technology is now being used.
In product development, generative AI is used to accelerate software delivery, using so-called code assistants to help with code translation and bug detection and report. These tools can also improve legacy code, rewriting it to make it more readable and testable and then documenting the results, the report says.
In client operations, generative AI is used to extract, search and summarize unstructured servicing information. In post-trade services, the technology is able to read documentation on corporate actions and assess the implications for clients and products, while in the middle office, generative AI is used to automate manual tasks, creating first drafts of environmental, social, and governance (ESG) and audit reports or even basic loan contracts.
Finally, in marketing and sales, generative AI is used to take over all voice and text interactions with clients, helping answer questions on topics such as investment ideas, sales, and product policies nearly instantly, and reducing time to respond to clients from hours or days down to seconds. The technology can also help junior relationship managers with training simulations and call transcripts, and can be used to create viable marketing content such as market recaps, research reports, and pitch books.
To capitalize on the opportunities brought about generative AI, McKinsey advises CIB organizations to choose the right use cases and build scalable capabilities, stressing that key elements for successful implementation include a strategic roadmap, talent development, data optimization, and modern technology infrastructure.
The consultancy warns however that CIB organizations must be mindful of risks related to generative AI, such as bias, privacy concerns, security threats, ESG impact, and computing costs.
To mitigate these risks, organizations should plan meticulously and establish robust AI governance frameworks that help ensure attention to data selection, continuous performance monitoring, and periodic, unbiased testing and auditing, the report says. These emerging technologies call for a reevaluation of current operating models and a fresh focus on risk management strategies.
New market structures
Another trend highlighted in the McKinsey report is the shift in the structure of the CIB market with increased competition from nonbanks.
Originally operating in areas adjacent to wholesale banking such as private equity and retail payments, nonbanks have over the past years managed to scale their value propositions to target some of the same client segments as CIB organizations.
But the biggest disruption is arguably in leveraged lending where direct lenders are rapidly gaining ground, the report says. In March 2023, direct lending assets under management (AUM) globally reached US$760 billion, carrying on a 27% per annum growth rate since 2012. The surge in direct lending is expected to continue, driven by substantial private equity dry powder and expansion into larger deals and various debt instruments.
McKinsey advises CIB organizations looking to respond to the rise of direct lenders to consider revisiting their on-balance-sheet lending approach and taking advantage of off-balance-sheet partnerships and funds. However, prudent risk management is crucial given concerns about direct lending asset performance. Key risks to consider include rising interest rates, economic slowdowns, limited historical data on performance during recessions, and growing regulatory scrutiny.
The rise of digital assets
Finally, the McKinsey report highlights the rise of digital assets, a phenomenon that has prompted CIB organizations to explore the potential of the technology through tokenization.
Tokenization refers to the process of issuing a digital representation of an asset on a blockchain platform. These assets can be real-world assets such as real estate, commodities, and art; financial assets such as equities or bonds; or other non-tangible assets such as digital art and intellectual property.
Tokenization brings about many benefits including 24/7 operations, instantaneous settlement, and composable programmability, the report says, promising improved capital efficiency, operational costs, compliance, transparency, and market access.
Although the report notes that tokenization is still at an early-stage of adoption, the industry is showing signs of growth and development. It notes significant advances in cash tokenization with now US$120 billion of tokenized cash in circulation, emerging regulatory frameworks, better short-term business case fundamentals and a maturing infrastructure.
For CIB firms looking to tap into the potential of digital assets and tokenization, McKinsey advises them to consider building their understanding of the technology and its associated risks, especially in the areas of wallet infrastructure and management duties, and system design. They should also consider establishing ecosystem relationships, and participating in efforts to set standards for the sector.
The state of the global CIB industry
CIB organizations have faced multiple challenges over the past decades but have against all odds managed to remain resilient and recover. In 2022, CIB organizations generated US$2.9 trillion of revenue, representing 44% of the global banking revenue pool and an average growth rate of more than 5% per annum since 2020.
Commercial lending and cash management accounted for more than 80% of CIB revenues that year, reflecting the sector’s tight link to the real economy. In contrast, more complex and volatile products such as specialized lending, investment banking, and sales and trading, accounted for less than 20% of CIB revenues.
