Non-Banks Threaten $30 Billion in Corporate & Investment Banking Revenue by 2027: Oliver Wyman Study
By Philipp Habdank, Frankfurt
Bank loans to individual customers pose potential risks to financial institutions' financial health.
It's deja vu all over again in the banking world, with non-banks like hedge funds and high-frequency traders muscling their way into banks' trading business—and now, Corporate & Investment Banking is next in line, according to a study by consulting firm Oliver Wyman. But fear not, banks could stand to grab $15 billion in new revenue opportunities if they partner with credit funds.
Panic Stations Ahead?
Over the past decade, non-banks have already disrupted banks' equity trading, currencies, and sometimes interest rate products. Now, they're coming for corporate and government bond trading, aka the rates and credit business, says Magnus Burkl of Oliver Wyman.
The hades has already yawned, as many banks have already abandoned equity trading, shifting to "equities prime" business, which serves non-banks in equity trading. But bond trading is still relatively analog, with plenty of phone calls and a strong role for banks—for now, anyway.
Attack of the Credit Funds!
As bond trading becomes increasingly digital, non-banks are stepping up their game. Large and regional banks with capital market businesses are particularly vulnerable, says Burkl. But the silver lining? Banks stand a chance to break into the fixed-income prime business, much like the shift that happened in the equities arena.
Banks: Under Siege and On the Offensive
It's not just trading that's under attack. Private credit funds and asset managers are becoming formidable competitors in traditional bank lending. They've already made big inroads in purchasing leveraged loans from banks, and credit funds are diversifying their businesses, says Burkl.
Credit Funds: The New Kids on the Block
These funds aren't just snapping up leveraged loans without bank intermediation, they're also financing SMEs not owned by private equity. They're venturing into asset-based finance and financing infrastructure and real estate projects, putting pressure on regional banks, whose business models are even more focused on company financing.
But this isn't all bad news for banks; collaboration with credit funds could boost their profitability, says Burkl. Credit funds collect capital from investors and lend it out in the form of loans. Fund managers often need a "bridging loan" until they have the promised capital from their investors, and banks could fill that gap, according to Burkl.
But it gets even better for banks. The CLO market has grown, and the securitization vehicles (SPV) behind it need financing. It's expected that credit fund managers will also invest their own money in the fund, which could be funded by banks, says Burkl. Credit funds may be famished for assets, but they tend to lack the origination power of banks, providing banks with an opportunity to structure and resell loans to funds. Banks might lose out on direct lending business, but could at least partially make up for it by leveraging this strategy.
In Conclusion
History doesn't repeat itself, but it often rhymes—and the banking industry would do well to heed the message. The threat is real, but so are the opportunities. Banks must adapt, collaborate, and think outside the box to stay afloat and thrive in this new financial landscape.
- Oliver Wyman forecasts that non-banks could potentially seize $15 billion in new revenue opportunities for banks if they partner with credit funds in the Corporate & Investment Banking sector.
- As the bond trading industry becomes more digital, non-banks are increasingly posing a threat to large and regional banks with capital market businesses, according to Magnus Burkl of Oliver Wyman.
- Banks could boost their profitability by collaborating with credit funds, as fund managers often require bridge loans until they receive capital from investors, a service banks could provide, suggests Burkl.
