Corporate banks in the Asia-Pacific region will likely outstrip their global counterparts in terms of revenue growth over the next five years, but it will not be all smooth sailing, according to the Boston Consulting Group.
It warned that players in the sector face compressed profit margins, unless they contend with disruptive trends like tighter regulation and digital banking.
Asia-Pacific corporate banking revenue is forecast to hit US$1.4 trillion (S$1.9 trillion) by 2020, at a compound annual growth rate of 9 per cent from 2012.
That would surpass the 8 per cent growth estimated for the developing regions of Latin America, as well as the Middle East and Africa, where corporate banking is still a developing market.
Developed markets in Western Europe are expected to see the slowest growth of 4 per cent to US$511 billion by 2020, while North America will fare better, with 6 per cent growth to US$486 billion.
The report found that corporate banking still presents a more attractive business, compared with segments like retail banking, and accounts for about half of the global banking market's revenue pool.
But the 250 financial institutions surveyed by the Boston Consulting Group last year, including 41 from the Asia-Pacific region, have found it a challenge to maintain profitability in the
wake of the global financial crisis.
The poll found that about 67 per cent of their corporate banking divisions have returns on capital below the hurdle rate.
The hurdle rate is the minimum rate of return that is required for an investment to be worthwhile.
In this case, the Boston Consulting Group set a pre-tax hurdle rate of 16 per cent in its calculations.
This means corporate banks should aim for pre-tax returns of 16 per cent and above.
Corporate banks are confronted by challenges on several fronts, including the threat from the digital space, where existing players may not have invested sufficiently in technology to cater to client preferences for fully integrated solutions.
Traditional lenders also face competition from the likes of new rivals, like shadow banks, which are encroaching into their territory by connecting borrowers directly with other sources of finance, and bypassing banks.
Tighter regulation is also affecting corporate banks, with regulators requiring higher capital buffer levels, among other rules, which have curtailed their ability to grow.
"While it would be premature to write the obituary for corporate banks as we know them, today's players must markedly change how they do business if they hope to thrive in the future," said Mr Jurgen Schwarz, the global leader of Boston Consulting Group's corporate banking segment.
Boston Consulting Group suggests that corporate banks need to develop new client solutions for those in different sectors, instead of having undifferentiated products across its customer base. Banks also need to adopt digital strategies to fend off the challenge from non-bank competitors like PayPal and Alibaba, which have set up digital financing and payment platforms.
Corporate banks should also build new credit capabilities to comply with Basel III global banking rules, such as providing new capital-light financing solutions such as asset-based lending.