Up to $50b of wholesale banks’ revenues at risk

But there’s about $15b in additional revenue up for grabs through 2027.

The wholesale banking market may see between $35b to $50b of existing revenues at risk as credit markets and regulations continue to evolve.

Regulatory pressure, product innovation, and the entry of new competitors into the most attractive segments of the market has broken banks’ stranglehold on liquid credit trading and private credit origination, according to analysts from Oliver Wyman and Morgan Stanley on their annual wholesale banking industry outlook published in November 2024.

Competition is on the rise with private credit managers continuing to expand their reach into product areas historically dominated by banks, such as asset-based financing and infrastructure financing.

“Banks have already ceded shares to private credit managers, particularly in middle-market direct lending, which competes directly with the broadly syndicated-loans (BSL) market dominated by the leverage finance teams of investment banks,” Oliver Wyman and Morgan Stanley analysts Dylan Walsh, Magnus Burkl, Julian Gorski, Daniel Martin, Christina Bi, and Anexandre Leary said.

At the same time, banks active in lending to US middle market companies– through traditional commercial and industrial loans or asset -backed finance– now face balance sheet pressures.

These pressures may intensify with new capital rules, or the elimination or softening of special tailoring provisions for smaller institutions, the management consulting firm added.

As the liquid and private credit markets continue to advance, between $35n to $50b of existing revenues of wholesale banks are at risk.  This represents 8-11% of the total credit revenue.

Despite this, wholesale banks are still on track to add approximately $55b to $90b of revenues by 2027 compared to 2019 revenues,

New opportunities
There’s $15b of incremental revenue up for grabs by 2027 from new opportunities.

The largest opportunity is providing financing to the credit manager ecosystem. It has lower regulatory capital requirements on exposures to funds.

Banks will still have their origination fees, as they are expected to continue to play a key role in originating, distributing, and structuring private credit assets in partnership with managers.

“Banks with strong sponsor business models and well-established distribution networks are most likely to benefit from the shift in the market, tapping into the enormous demand for asset origination, structuring, servicing, and financing from a new set of market participants,” Oliver Wyman said.

Industry-wide return on equity (RoE) will rise to approximately 14% by 2027, up from approximately 12% in 2023.

ROE will be supported by an expected “strong recovery” in investment banking.

There is also a diminishing risk of a significant increase in capital requirements as part of the Basel 3 Endgame package in the US and other jurisdictions, especially in the wake of the US elections.

“Whilst this remains a wild card worth monitoring — every 5% uplift in industry-wide capital would reduce RoE by approximately 60 basis points — it is an increasingly remote possibility,” Oliver Wyman said.