The economic downturn experienced around the world after March 2020 has been quite devastating, but the commercial and investment banking sectors have somehow been able to avoid a total meltdown similar to what happened in 2008. There is no question that banks are better prepared to withstand another global financial crisis, but there are serious concerns about what the future may hold for corporate banking operations over the next few years.
It should be noted that corporate banking had a terrible decade from about 2008 to 2018. In the United States, the biggest banks that were able to stay afloat thanks to generous bailout packages from the Federal Reserve and the Treasury first had to rebuild their retail image before they could concentrate on their corporate banking operations. The recovery of the American economy during the administration of former President Barack Obama was gradual but solid; by the time President Donald Trump was controversially elected, the new administration had a very strong base to work with.
Even though the American economy faced challenges and uncertainty such as political instability in Venezuela, tensions with Iran, Brexit, an impeachment trial, and trouble brewing within OPEC, there was a general feeling of optimism. Before the World Health Organization declared COVID-19 as a pandemic, consumer confidence was reasonably high thanks to record low unemployment rates. Despite the global trade war between China and the U.S., globalization was still one of the most attractive business models for major companies to follow, and this meant that the market for corporate banking services was still lucrative.
As explained in this news article from January 2020, major banks such as Citigroup were making progress in terms of providing advisory services to big players in the health sciences and technology sectors. Citigroup was not too interested in pursuing mid-sized companies because they were part of a market thoroughly dominated by competitors. Going after bigger clients made sense because this is a bank that is renowned for its global presence and international connections.
The coronavirus pandemic presents an even greater challenge for corporate banking operations because of how greatly it has eroded globalization. According to projections issued by PwC in April, the prolonged shutdown of many industries during quarantine periods in Germany will translate into a 2.1% loss for corporate banking. Figures for gross domestic product growth in the same country look dismal from now until the end of the year; the current outlook calls for reductions as high as 7% in major economies.
It may take about four years for corporate banking to return to the revenue levels enjoyed until February 2020, but there are some hopes that this sector will be able to push ahead. Companies will be looking for sources of liquidity, and this presents banks with a good opportunity because they will very likely have strong support from central banks. Risk management will be difficult unless governments are able to provide some guarantees, and this will largely depend on how well the bond markets can recover. Finally, new regulatory guidance will surely emerge, and it will be up to compliance officers to adjust as quickly as possible.