How Banks Can Turn Around Unprofitable Corporate Clients

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Bank profitability has taken a significant hit since the global financial crisis, forcing many banks to focus on cost savings. And they have made good progress in slimming branches, call centers and back-office operations. They have made less headway, though, on realizing the full potential of their relationships with corporate customers. Now they are at an inflection point with the likely rise in interest rates over the next few years.

Higher rates could lift the profitability of corporate banking, yet many banks are missing a chance to make the most of this scenario. Huge opportunities lie in a more rigorous approach to managing corporate client profitability.

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Most banks earn a 2% to 3% return on risk-weighted assets (RoRWA) in their corporate portfolio. Higher interest rates will increase the dispersion of RoRWA among banks, with the laggards holding level at best and the leaders potentially doubling their rate of return. If rates rise over the next few years to the point at which a bank lends at 5%, RoRWA could increase sharply, especially in the US and Europe, where rates have been very low.

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