After a recent period of growth, corporate and investment banks face significant headwinds. In the last few months, many leading global banks have issued warnings about the financial pressure they expect to come from high inflation, rapidly rising interest rates, economic uncertainty, and more stringent regulation in the sector. These challenges create an imperative to increase operating leverage and enhance resilience.
Leading firms are showing the way. Instead of launching piecemeal efforts, they are addressing the full business ecosystem—adopting modern operating models, leveraging new technologies in a front-to-back approach, and building talent and capabilities within the organization to sustain the impact of these shifts. These changes not only boost productivity and improve margins; they also enhance banks’ competitiveness and level the playing field with nonbank competitors.
This kind of change isn’t easy. For starters, it has to be a priority throughout the corporate and investment banking (CIB) division and run by a senior leader with a clear mandate. This individual—whether a chief transformation officer or a similar CIB executive-level role—has the authority to drive productivity, act decisively, and reallocate investment dollars.
The measures that leading banks are deploying to drive the resilience and productivity agenda forward can be categorized in three broad themes:
Streamlining the corporate operating model
- Reevaluating the regional footprint. Over the years, many banks have seen several of their regional operations evolve into de facto secondary or tertiary headquarters—this is an outmoded structure. A number of large banks have resized their major regional centers into much smaller sales hubs, adjusting their real estate and front-to-back footprint accordingly.
- Consolidating group-level roles. As banks have grown, functions such as risk, compliance, finance, legal, operations, and procurement have expanded to support the business and address new areas required by regulation. Leading banks are now reorganizing functions into more integrated units to increase productivity and quality, for example by leveraging the same data sets and platforms across functions. In some banks, this has meant the merger of CIB risk and compliance; in others, the finance and legal functions have been brought together. Yet others have combined operations, technology, and procurement under a COO or chief administrative officer (CAO).
- Taking a fresh look at support functions. Leading banks aren’t just consolidating their support functions, they’re reimagining them. Using zero-based design principles, they start from scratch to figure out what their product control organization or human resources department should look like. They think about the right mix of external versus internal support and the right perimeter of functions in shared services centers. The zero-based approach also provides the impetus to automate activities and streamline processes and workflows—a McKinsey analysis of corporate and business activities found that 40 to 50 percent of the activities in CIB support functions can be enabled through digitization and automation.
- Creating centers of excellence (COE). For certain banking functions, localization makes sense. Stress testing, reporting, or even middle-office activities, for instance, can operate more efficiently and with improved controls when consolidated across locations and allowed to operate without silos. In addition, risk, finance, and operations middle-office and analytics teams often work separately but use the same data. Bringing these teams together in a COE has, for some banks, facilitated building core expertise in certain activities, better use of investment, seamless collaboration, and lower overall costs.
Reconfiguring business sectors and product lines
- Refocusing on priority sectors. With underwriting and M&A business booming in the years leading up to 2021, banks increased new hires, adding investment bankers across sectors and geographies. Yet building a strong advisory business in all sectors is extremely difficult. Instead of trying to serve all segments, some banks are now refocusing their research and advisory efforts either in a targeted set of areas for which they have a natural affinity, for example a strong balance sheet with corporates in agriculture or oil and gas. Or they focus on industries that are projected to see the most M&A and underwriting activity—some banks, for example, are focusing on healthcare, technology, media, and telecommunications.
- Spinning off tech-driven businesses. Some banks have never developed sufficient strength or scale in businesses such as cash equities, vanilla rates trading, foreign-exchange trading (forex), or vanilla trade finance. For these firms, partnering with a top-five, at-scale player could improve the quality of their product offering and lower overall costs. Some banks have already formed partnerships for specific asset classes, such as emerging-markets forex, or have developed broader partnerships for the equities business.
- Optimizing the front line’s performance with analytics enabled by AI and machine learning. As client needs become increasingly complex, significant opportunities exist to help frontline relationship managers work more productively. By using advanced data analytics, banks can simplify and streamline the front line’s day-to-day tasks and help them understand clients better. One multinational bank used AI to analyze microsegments of customers and generate powerful insights for relationship managers to act upon. They also created a structured content management system that lets bankers use natural-language search to find information that was previously scattered across the bank. These and other initiatives have saved 200,000 hours of banker time per year, our analysis shows, freeing up time for activities that could add more value.
- Adjusting coverage models based on client potential and complexity. At many banks, CIB coverage models remain high touch with very limited flexibility to calibrate for client potential and complexity of clients’ servicing needs. While clients appreciate having a single point of orchestration within the bank, respondents to a McKinsey survey of more than 200 CFOs and treasurers of large-cap companies said they also value speed of execution and direct access to relevant subject matter experts. Leading institutions are starting to take a tiered approach to their client base with coverage “hubs” in which “pods” of midlevel relationship managers handle the flow of client product needs or do end-to-end coverage of less complex clients. Another approach is to modernize journeys for corporate and institutional clients on bank portals to offer end-to-end digital self-service, or digitally assisted onboarding and servicing depending on the complexity of client needs.
Sharpening IT and operations
- Ensuring engineering excellence. To stay competitive, banks must continuously monitor clients’ changing needs and behaviors, then rapidly innovate to serve clients with greater ease of use and streamlined experiences. This requires increased digitization and use of analytics in client journeys, starting with onboarding and know your customer (KYC), improved straight-through processing, and analytics-driven anti-money-laundering and fraud management. Technical talent, including software and AI engineers, are critical to this mission and should be at least 60 percent of a bank’s IT workforce. To unlock the full power of innovation, engineering teams should operate in an agile way—doing rapid test-and-learn, collaborating with functions outside IT, and quickly putting minimum viable products into the market.
- Implementing strategic consolidation and review of vendors. At most commercial and investment banks, vendors are crucial. They deliver expertise, help control costs, and often perform mission-critical functions like brokerage clearing and exchange. Yet the universe of vendors tends to grow over time, especially without rigorous oversight. Banks can streamline costs and boost impact by establishing a systematic process and capability for vendor management, ensuring consistent and detailed reviews of all vendors. Most firms will also benefit from consolidating vendors (for some categories) into three or four strategic partners, with a long tail of additional relationships organized under them.
The banking industry continues to face ripple effects from high inflation, tightening monetary policy, and persistent supply chain shocks. Now is the time for bold actions to create a sustainable economic model that is less capital intensive and more focused on growth and building quality client relationships.