Wall Street banks are at ‘an inflection point’ — and it’s bad news for traders

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Morgan Stanley/Oliver Wyman

  • Morgan Stanley and Oliver Wyman just published their annual blue paper on wholesale banks and asset managers.
  • The report highlights growing pressures on the asset management industry, which will in turn translate into added cost pressures for the wholesale banks that serve them.
  • “We think we are at an inflection point,” the report reads. “Institutional and corporate client revenue pools have historically grown at a similar pace, each comprising ~50% of global wholesale banking revenues. However, tailwinds on the corporate wallet and pressures on the institutional wallet present a shift that we think is here to stay.”

Wall Street banks are at “an inflection point.”

According to a big report from Morgan Stanley and Oliver Wyman on wholesale banks and asset managers, it’s now time for banks to shift their focus towards corporate business, versus the institutional investor clients they’ve been focused on.

That’s because the asset managers are under intensifying cost pressure. As a result, institutional client revenue growth over the next three years is forecast to slow to a compound annual growth rate of 2%. Corporate client revenues in contrast are forecast to grow at CAGR of 5% in the short term, as rising rates bolster various business lines.

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Morgan Stanley/Oliver Wyman

“We think we are at an inflection point,” the report reads. “Institutional and corporate client revenue pools have historically grown at a similar pace, each comprising ~50% of global wholesale banking revenues. However, tailwinds on the corporate wallet and pressures on the institutional wallet present a shift that we think is here to stay.”

The report highlights a positive medium-term outlook for corporate revenues in macro trading, dealmaking, and transaction banking.

“Cyclical tailwinds are set to drive revenue growth in the corporate segment, but with very different dynamics between “CFO-down” and “CFO-up” relationships,” the report said.

“CFO down” businesses include debt business, lending, cash management and trade finance. As the name suggests, these are usually delivered to the CFO and Treasury units. These businesses tend to be sticky and stable, and will benefit from rising rates. And it’s here that Morgan Stanley and Oliver Wyman are forecasting the fastest growth in revenues (5.5% CAGR over the next five years).

“CFO-up” products in contrast include headline grabbing equity deals, mergers and acquisitions, and leveraged finance. These are higher return businesses, but also more volatile and more relationship based. Specialized advisory firms have already eaten in to this revenue pie, taking market share from the bigger banks.

The report said:

“To win with corporates, banks need to invest in relationship bankers for CFO-up businesses and in technology for CFO-down businesses. CFO-up products, like M&A advisory, are high-touch relationship-driven businesses. We don’t think that will change any time soon. Highly skilled relationship bankers are key for banks to continue investing in. For CFO-down products, like transaction banking, technology is set to disrupt, define and expand the future state of the industry.”

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Morgan Stanley/Oliver Wyman