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1、M BluePaperOliver Wyman is a global leader in management consulting.For more information,visit .Oliver Wyman is not authorized or regulated by the PRA or the FCA and is not providing investment advice.Oliver Wyman authors are not research analysts and are neither FCAnor FINRA registered.Oliver Wyman

2、 authors have only contributed their expertise on business strategy within the report.Oliver Wymans views are clearly delineated.The securities and valuation sections of this report are the work of Morgan Stanley only and not Oliver Wyman.For disclosures specifically pertaining to Oliver Wyman,pleas

3、e see the Disclosure Section located at the end of this report.Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research.As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Resear

4、ch.Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.For analyst certification and other important disclosures,refer to the Disclosure Section,located at the end of this report.+=Analysts employed by non-U.S.affiliates are not registered wi

5、th FINRA,may not be associated persons of the member and may not be subject to FINRA restrictions on communications with a subject company,public appearances and trading securities held by a research analyst account.Global Banks&Asset ManagersExtending Credit:The Evolving Role of Wholesale Banks in

6、Credit MarketsA generational shift is underway in global credit markets;this will squeeze the traditional sources of value in the business,but at the same time expand the universe of opportunities for banks that can adapt their model to the new landscape.M BluePaper2AuthorsMORGAN STANLEYOLIVER WYMAN

7、Betsy L.Graseck,CFA1EQUITY ANALYST+1 212 761-8473Betsy.GMichael J.Cyprys,CFA,CPA1EQUITY ANALYST+1 212 761 7619Michael.CVishwanath Tirupattur1STRATEGIST+1 212 761 1043Vishwanath.TGiulia Aurora Miotto,CFA2EQUITY ANALYST+44 20 7425-5344Giulia.Aurora.MBob Huang1EQUITY ANALYST+1 212 761 6136Bob.HBruce Ha

8、milton2EQUITY ANALYST+44 20 7425-7597Bruce.HManan Gosalia1EQUITY ANALYST+1 212 761 4092Manan.GConnell J.Schmitz1RESEARCH ASSOCIATE+1 212 761 6252Connell.SRyan Kenny,CFA1EQUITY ANALYST+1 212 761 1664Ryan.KDylan WalshPARTNER+1 617 650 1457Dylan.WJulian GorskiPARTNER+1 610 639 951794Julian.GMagnus Burk

9、lPARTNER+49 69 97173457Magnus.BDaniel MartinENGAGEMENT MANAGER+44 7920 877901Daniel.MAlexandre LearyASSOCIATE+44 7810 173481Alexandre.LChristina BiASSOCIATE+852 22011764Christina.BAlex WrayCONSULTANT+44 7587 821879Alex.WAlice BruCONSULTANT+44 7587 821879Alice.B1 Morgan Stanley&Co LLC 2 Morgan Stanle

10、y&Co.International PLC+3 Morgan Stanley Europe S.E.+=Analysts employed by non-U.S.affiliates are not registered with FINRA,may not be associated persons of the member and may not be subject to FINRA restrictions on communications with a subject company,public appearances and trading securities held

11、by a research analyst account.M BluePaperMorgan Stanley Research3ContributorsMORGAN STANLEYOLIVER WYMANHuw van SteenisVICE CHAIRHuw.VanSSteven ZamskySENIOR ADVISORSteven.ZRonan OKellyPARTNERRonan.OKElisa HainingPRINCIPALElisa.HPhilip JacobsPRINCIPALPhilip.JLaura WatkinENGAGEMENT MANAGERLaura.WKatie

12、SessaENGAGEMENT MANAGERKatie.SElena CamiciolaENGAGEMENT MANAGERElena.CMichael MagumbeSENIOR RESEARCH ANALYSTMichael.MAlvaro Serrano3EQUITY ANALYSTAlvaro.SStephanie Ma1RESEARCH ASSOCIATEStephanie.MMarina Massuti2EQUITY ANALYSTMarina.MJoyce Jiang1STRATEGISTJoyce.JErica Reynolds1RESEARCH ASSOCIATEErica

13、.RJames Koehne1RESEARCH ASSOCIATEJames.KMia Nagasaka4EQUITY ANALYSTMia.NNick Lord5EQUITY ANALYSTNick.LPamela Zuluaga2EQUITY ANALYSTPamela.ZGulnara Saitkulova2EQUITY ANALYSTGulnara.S1 Morgan Stanley&Co LLC2 Morgan Stanley&Co.International PLC+3 Morgan Stanley Europe S.E.+4 Morgan Stanley MUFG Securit

14、ies Co.,LTD.+5 Morgan Stanley Asia(Singapore)PTE.+M BluePaper4 Contents 5 Executive Summary 6 Section 1.Industry Outlook 10 Section 2.The Credit Transformation 14 Section 3.Risks and Opportunities for Wholesale Banks from the Transformation21 Section 4.The Role of Wholesale Banks in the Future Lands

15、cape25 Section 5.Conclusion M BluePaperMorgan Stanley Research5Executive Summary Outlook for wholesale banks Wholesale banks have spent the years since the Global Financial Crisis reshaping their business models to build resilience and gen-erate sustainable returns.This transformation has been profo

16、und,as evidenced by the performance across the industry through a wave of very different market shocks.While the macroeconomic outlook remains uncertain,we expect Corporate and Institutional Banks to continue delivering healthy returns in most probable scenarios and to outperform in our base case,wh

17、ich assumes a soft landing.Critical to sustaining this robust outlook is the declining risk that US regula-tors implement aggressive new capital requirements as part of the Basel 3 Endgame rulemaking.Credit is one area where the transformation of the wholesale banking business model is not complete.

18、The structure of the credit businesses within Corporate and Institutional Banking(CIB)and Commercial Banking still look much like they did before the crisis:several,largely independent,businesses that originate,hold,and dis-tribute credit risk in different ways.However,regulatory pressure,product in

19、novation,and the entry of new competitors are now shifting the sources of value for these businesses.We estimate that$35-50 billion in existing banking revenue is at risk in the transition(representing 8-11%of the$440 billion of revenue generated by banks in credit activities across CIB and Commerci

20、al Banking in 2023).The evolution in credit is not necessarily bad news for banks.As observed in the Equities and Macro businesses over the past 20 years,opportunities will emerge for banks to serve a more diverse landscape of market participants,in ways that may consume less cap-ital and drive stro

21、nger overall returns.We estimate that wholesale banks will be able to recover up to$15 billion in banking revenues through these pathways,with the largest opportunities in financing alternative asset managers,Private Credit funds,and the assets underlying these portfolios.On balance,our base case ou

22、tlook for CIB businesses remains pos-itive.We expect new opportunities to offset all of the revenue at risk in non-lending businesses within CIB;direct lending to corporate cli-ents in CIB and Commercial Banking will be hit harder.Banks with strong sponsor finance models and well-established distrib

23、ution networks are most likely to benefit from the shift,tapping demand for asset origination,structuring,servicing,and financing from a new set of market participants.The winners in the credit market transformation will be the wholesale banks that embrace these shifts and adapt their busi-ness mode

24、ls to serve the evolving ecosystem,capture new sources of value,and manage emerging risks.This will become an increasingly important source of differentiation and outperformance in the future.We expect to see significant shifts in the client wallet and market share across the newly defined perimeter

25、 of the credit busi-ness.M BluePaper6Section 1.Industry Outlook This section examines the evolution of global CIB revenue pools from 2024 to 2027 under three economic scenarios.This forms the baseline for our analysis of revenues at risk and opportunities for growth from the credit transformation la

26、ter in the report.Industrywide revenues have remained virtually unchanged over the past three years:$585 billion in 2022,$584 billion in 2023,and tracking to approximately the same result in 2024 through mid-year.However,the stable overall performance masks shifts at the business level with signific

27、ant erosion in Investment Banking,strong growth in Transaction Banking,and more resilient performance in Markets businesses consis-tently since the pandemic.The key driver of these shifts has been the end of a prolonged period of easy monetary policy and fiscal stimulus across the world,as central b

28、anks raised rates and retired or reversed quantitative easing policies.Higher funding costs and economic uncer-tainty have created headwinds for advisory and origination in Investment Banking,while interest income has risen across Lending,Transaction Banking,Securities Services,and Markets businesse

29、s striking a balance in the results.The key question entering this tightening cycle was whether indus-trywide revenues(and especially Markets revenues)would snap back to pre-pandemic le.vels,where near zero rates and suppressed volatility across asset classes squeezed revenues to$524 billion,even as

30、 capital requirements climbed.We explored this question in our 2022 outlook and found evidence of several structural shifts that we expected would add$55-90 billion in aggregate to industry rev-enue pools.We have revisited this analysis for our 2024 outlook and remain confident that the industry is

31、not at significant risk of returning to the pre-pandemic doldrums,thanks to three structural shifts:Rates Normalization:We estimate that the industry has added$35 billion+of revenue since 2019 in businesses driven predominantly by the higher rates environment(e.g.,Transaction Banking,Securities Serv

32、ices).1 The question moving forward is how much of this growth will be sustainable in a normalized rates environment.No consensus economic forecast projects a return to global rates anywhere close to pre-pandemic conditions,so our view is that rates will likely remain sufficiently elevated to drive

33、healthy interest income across wholesale banking businesses.We estimate the structural growth from rates normalization(vs.the 2019 baseline)should be$20-30 billion of revenue under these conditions.1.This estimate understates the full impact of the higher rates environment,which has also been a stro

34、ng driver of interest income in Markets and Lending businesses.We have excluded these revenue streams from this analysis because interest income in Markets businesses(i.e.,carry)is challenging to isolate from client intermediation and the vast majority of CIB Lending activity is relationship lending

35、 typically run at cost.Exhibit 1:Evolution of CIB revenues by business,$bn,2019-2024 1H1291381255814414518090210161212115697967392012201320142015201620172018201920202021202220231H 2024551546554536528531534524572599585584302IBDMarketsTransaction Banking+Securities ServicesLendingCAGR2019-23-4.1%+7.0%

36、-2.6%+5.6%Source:Coalition Greenwich Competitor Analytics 1H24,Oliver Wyman analysisM BluePaperMorgan Stanley Research7 Market Volatility:The defining feature of the pandemic cycle was a volatility-fuelled spike in Markets revenues across multiple asset classes,including G10 Macro,Commodities,and Eq

37、uities(more so in derivatives than cash trading).This peaked in 2022,when revenues from these businesses hit$125 billion,approximately 1.5x 2019 levels.We do not expect a return to 2022 results,but we do see sus-tained levels of volatility and increased demand for hedging across all asset classes,dr

38、iven by higher rates,currency fluc-tuations,and commodity price spikes driven by global con-flicts and energy security concerns.We estimate the structural growth from market volatility to be$20-30 billion under these conditions.Corporate Demand:We are in the advanced stages of a struc-tural shift in

39、 demand for wholesale banking services from corporate clients(down the size spectrum into middle market)that began after the Global Financial Crisis with the pullback in bank lending.This is most visible in Investment Banking revenue pools,but also extends to the expanding universe of clients demand

40、ing Transaction Banking and Markets services(for risk management,liquidity manage-ment,and financing).The channels through which wholesale banks reach the corporate market is evolving(see Sections 2 and 3);the underlying demand from corporates will continue to grow as capital markets deepen,especial

41、ly in Europe and Asia,and financial sponsors expand their reach to corporates around the world.This is the most volatile revenue pool given sensitivity to economic conditions and the rates environ-ment.However,we estimate that structural growth in corpo-rate demand across non-lending products should

42、 be$15-30 billion of revenue through the cycle.Exhibit 2:Structural growth in CIB revenues,$bn,2019-2027F20-30Rates Normalization20-30MarketVolatility15-30CorporateDemand55-90TotalStructural DriversSource:Coalition Greenwich Competitor Analytics 1H24,Oliver Wyman analysisTaken together,these structu

43、ral shifts provide the foundation for a relatively healthy revenue and returns outlook for the wholesale banking business.A wide range of plausible scenarios could play out,shaping the outlook for wholesale banking.These center around the path of inflation,rates,and economic growth;persistent uncert

44、ainty over global trade disruptions;and a deepening divide in the approach to bank(and non-bank)regulation in different jurisdictions.We assess the outlook across three scenarios:Soft Landing(base case):Our base case scenario is the most optimistic for the global economy and CIB revenue pools.In thi

45、s scenario,central banks in most major economies(excluding Japan)lower policy rates,supporting economic recovery or growth without driving a new inflationary cycle.Investment Banking rebounds as confidence grows.Markets and Transaction Banking revenues normalize,but both remain elevated vs.pre-pande

46、mic levels.Crucially,the reduced likelihood of an aggressive rollout of the final Basel 3 capital requirements in the US allows banks to sustain close to current levels of capacity in capital-intensive businesses.Bumpy Landing:The first of our two“stress”scenarios is trig-gered by a sharp slowdown i

47、n global economic growth,forcing more aggressive rate cuts from central banks fol-lowed by a 2-to 3-year cycle of rebalancing to bring inflation under control without pushing the economy into recession.The slowdown in economic growth is coupled with deterio-rating corporate credit conditions and ass

48、et price volatility,extending the weak run in Investment Banking.Markets(par-ticularly Macro)remain strong in the volatile environment.Transaction Banking and Securities Services follow the rates path,as they have for the past decade.Deglobalization:The second of our two“stress”scenarios is driven b

49、y the accelerating fragmentation of global markets and economic conditions,triggered by ongoing geopolitical tensions and diverging macroeconomic and trade policies in major economies around the world.The US becomes more isolated in trade,exacerbating economic challenges in Europe and China.Japan(pa

50、rticularly the Japanese banking sector)continues to face extreme volatility as the economy exits decades of zero/negative interest rate policy.In this sce-nario,the US economy follows a“soft landing”path,while Europe,Asia,and Emerging Markets track the“bumpy landing”outlook.M BluePaper8Exhibit 3:Sum

51、mary of outlook scenarios,2024-2027FOutcomesFeaturesSolutionStable revenue growth propped up by Investment Banking as M&A bounces back,offset by cooling of transaction banking and markets performance Inflation gradually declines towards target Controlled rates decline Steady but healthy economic gro

52、wth Macro volatility declines slightly Asset prices continue to increase gradually,NIM narrows as rates decline Geopolitical landscape remains fraught,without major dislocationsScenario A:Soft LandingPull-back in 2025 followed by gradual recovery,as perfect storm of macroeconomic factors depress bot

53、h interest and non-interest revenues Economic growth falters and inflation rapidly reaches target More aggressive and proactive rate cuts Equity market slowdown due to weaker earnings outlook Elevated rates volatility due to uncertain outlook Deteriorating credit conditionsScenario B:Bumpy LandingGr

54、owth in the US but weaker European and APR outlook due to US isolationist policies;strong markets performance through high volatility Stringent US tariffs hampering European and APR growth High levels of commodity,FX,and rates volatility Multiple supply chain dislocations Inflation sticky but declin

55、ing,rates fall graduallyScenario C:DeglobalizationSource:Oliver Wyman analysisExhibit 4:CIB revenue outlook,$bn,2019-2027FProjectedScenario ASoft LandingScenario BBumpy LandingScenario CDeglobalization494950535760575860595354555955565796868856637873687876798077716969777677773948504044515356585041434

56、552515354677899889184828898908790999879957167868374889484889399FY19101131FY20123132FY21112106131FY22123125FY23120121FY24F103117123FY25F100116125FY26F103118127FY27F118118FY24F113114FY25F108116FY26F109119FY27F118118FY24F101112115FY25F108117FY26F110120FY27FIBDMacroSpreadEquities138Securities ServicesLe

57、nding524572599585584603620Transaction Banking629594564568578599598603614617Note:Forecasts do not include credit losses.Source:Coalition Greenwich Competitor Analytics 1H24,Oliver Wyman analysisM BluePaperMorgan Stanley Research9In our base case,we estimate that industrywide Return on Equity(RoE)will

58、 rise to 14%by 2027(from 12%in 2023).The RoE improvement is driven by the projected recovery in Investment Banking,which tends to deliver disproportionate RoE improvement in an upcycle given the cost and capital structure of the business.The relative shift in business mix alone is sufficient to deli

59、ver close to 2 percentage points of RoE improvement vs.the 2023 baseline,though we also project marginal gains in profitability across CIB businesses as inflation declines,some expensive regulatory programs wind down,and banks execute on cost plans in a less uncertain environ-ment.We do not project

60、a very heavy drag on RoE in either of our stress scenarios,due in part to the nature of the scenarios we explore and in part to the greater resilience of the wholesale banking business model today.In both stress scenarios,the largest source of revenue growth over the forecast period remains Investme

61、nt Banking(even if the path to 2027 is far less smooth).Likewise,the volatility trig-gered by rates shocks(“bumpy landing”)and geopolitical tensions(“deglobalization”)drives short-term revenue growth in Markets businesses,helping to offset any weakness in pro-cyclical businesses.We estimate the down

62、side for each stress scenario is no more than 120bps in 2027.The significant wildcard is the final set of capital requirements under Basel 3 Endgame in the US and other jurisdictions.US banking regula-tors have yet to release their revised proposal for implementation of Basel 3 capital rules and it

63、is unclear if they ever will under the new administration,so uncertainty remains high.The expectation is that the projected uplift in bank-wide capital requirements will be sub-stantially reduced from initial estimates,though we note the pro-posed rules are still likely to have a disproportionate im

64、pact on Markets businesses that contribute the majority of wholesale banking RWAs.Every 5%uplift in industrywide capital would reduce RoE by 60bps,so this remains a critical watchpoint for the industry.Exhibit 5:CIB revenue soft landing outlook including base case impact of credit business transform

65、ation,$bn,2019-2027F13.4%12.3%13.3%1.0%FY220.0%Revenue impact0.7%Cost impact0.4%Capital impactFY23FY24 forecastFY27 outlook14%Source:Bank disclosures,Coalition Greenwich Competitor Analytics 1H24,Oliver Wyman analysis,.Industry aggregates exclude UBS and Credit Suisse.,A second,significant,wildcard

66、is the impact of a fundamental transformation of the credit business across the wholesale banking industry.M BluePaper10Section 2.The Credit Transformation This section examines the past and anticipated evolution of the credit business for wholesale banks.Our wholesale banking perimeter includes bot

67、h Corporate and Institutional Banking(CIB)and Commercial Banking businesses.We explore the shifts in the Liquid Credit trading landscape and the threats and opportunities from the rise of the Private Credit ecosystem,framing key debates on how the role of wholesale banks in the credit ecosystem will

68、 evolve.In recent years,there has been an intensifying spotlight on the role of non-banks in credit markets.New business models have emerged to fill the space vacated by banks,which have faced greater capital pressure and been unable to fully meet the demand from a rapidly expanding universe of spon

69、sor-backed borrowers and credit inves-tors.However,this is far from a zero-sum game for wholesale banks.Much like the evolution of the Equities markets,new businesses are emerging to support an evolving ecosystem with new market partici-pants across the value chain.This evolution has compressed exis

70、ting sources of value for banks and will continue to do so,while simulta-neously creating new opportunities to generate revenues and returns by supporting the ecosystem.Credit has always been a core pillar of CIB and adjacent Commercial Banking businesses.In total,credit products contribute$440 bil-

71、lion of revenue for banks globally,evenly split across CIB and the Commercial Bank.Exhibit 6:Credit products across CIB and Commercial Banking businessesIBDMarketsCorporate lendingCommercial lendingInvestment Grade DCMLeveraged FinanceFlow CreditEmerging Market CreditAsset FinanceLendingSource of re

72、venueOriginationStructuring and distributionNIMCredit tradingServicingLiquid CreditLiquid Credit and Private CreditPrivate CreditCREVanilla LoansProject FinanceCREAsset-based Finance Acquisition FinanceTrade FinanceSecuritisationStructured Credit CLOStructured Credit RepoStructured Credit OtherLarge

73、 corporatesSMEMid-marketSource:Oliver Wyman analysisWe broadly define Liquid Credit as instruments issued as public securities that can be publicly traded(such as investment grade and high yield bonds)and Private Credit as all other forms of credit to public and non-public institutions that are mana

74、ged by both banks and private managers.Both the Liquid and Private Credit markets are reaching inflection points in their market structure.M BluePaperMorgan Stanley Research11Exhibit 7:Liquid Credit vs.Private Credit definitionLiquid CreditPrivate CreditWidest Private Credit perimeter Credit instrum

75、ents issued as publicsecurities and publicly tradedCredit originated and managed bynon-bank entitiesCredit to non-public companiesmanaged by banksInvestment Grade Bond IssuanceHigh Yield Bond IssuanceRMBS,CMBS,ABSFlow Credit TradingStructured Credit Corporate LendingLeveraged&Acquisition FinanceProj

76、ect&Infrastructure FinanceAsset-Based FinancingAsset Finance(incl.CLOs)Trade Finance Fund FinanceOpportunistic Lending(e.g.Special Situations)Direct LendingAsset-Backed LendingSource:Oliver Wyman analysis2.A.Liquid Credits tipping pointAfter years of inertia,the Liquid Credit market is undergoing a

77、fundamental transformation,following in the footsteps of Equities and Macro.Waves of innovation,including electronification of credit trading,growth in satellite credit markets,data and pricing transparency,and trading automation are generating opportunities for banks to serve a more diverse set of

78、market participants and generating new sources of competi-tion for market making in these products.Exhibit 8:Waves of evolution in the Liquid Credit marketPhase 1Electronification and standardisation Emergence of electronic bond trading venues Increased uptake of electronic trading for most liquid p

79、roductsPhase 2Satellite markets to support liquidity Development of derivative markets such as CDS Growth in credit ETFs supporting price discoveryPhase 3Data democratisation and transparency Regulatory action to increase market transparency(FINRA,CSDR,MiFID II)Increased data availability,price tran

80、sparency,and pricing options(e.g.third-party pricing)Phase 4Low touch trading andautomation Diversification of trading protocols(CLOBs,two-way pricing,automatic execution)Increase in electronic portfolio trading,particularly via ETFs Rise in algorithmic trading,systematic,quant and index strategiesS

81、ource:Oliver Wyman analysisM BluePaper12Until 2020,bond market electronification was nascent,with most trades executed by voice via traditional broker-dealer channels.Since then,the most liquid fixed income products have moved up the matu-rity curve,with products such as European Investment Grade Co

82、rporate Bonds now primarily traded electronically.Products with greater heterogeneity and fragmented pools of liquidity have been slower to adapt,but are also making inroads,including European and US High Yield Bonds.The growth of credit ETFs has significantly increased liquidity in the Liquid Credi

83、t market,driven by investor appetite for credit exposure through cheaper structures than mutual funds and direct bond hold-ings.The pandemic accelerated market structure shifts,with deterio-rating liquidity in underlying assets pushing ETFs to the fore as key sources of liquidity.In parallel,creatio

84、n and redemption of ETFs by issuers and market makers helped boost market liquidity in ETF con-stituents.These shifts have been accompanied by a rise in portfolio trading,which has reduced the costs and barriers to trading in less liquid instruments.A network of players such as credit trading venues

85、,specialist credit technology firms,and data providers has also developed to increase market efficiency,transparency,and resil-ience.The electronification of these markets has opened the door to non-bank market makers,who have trained powerful algorithms first deployed in other asset classes to buil

86、d automated bond pricing models.Banks with major Markets businesses have also leaned into automated bond trading technology,but are facing tough competi-tion from next generation of trading firms.As Liquid Credit market structures and dynamics start to resemble parts of Equities and Macro,value capt

87、ure and market share is shifting toward these non-bank players,who have the technical and technological prowess and risk appetite to outcompete banks.It is unlikely that Liquid Credit will electronify to the same extent as Equities some corners of the market will continue to be best suited to voice

88、execution,where bespoke pricing is required due to order size or trade structure.But in the large slices of the market that come up the maturity curve,the value potential for banks will likely shift away from playing a market making role(where non-banks will continue taking share)toward servicing th

89、e non-bank Liquid Credit traders.When Equities markets were disrupted in similar ways many years ago,a new business model emerged(or expanded significantly)to serve the new ecosystem:Prime Services.The model evolved to pro-vide a broad offering,including direct and synthetic market access,a diverse

90、array of financing options,and investor services that hedge funds and some asset managers rely on.Since 2008,Prime Services has effectively replaced Cash Equities trading as the primary source of value in the business(excluding the more volatile Derivatives busi-ness).In 2008,Prime Services was half

91、 the size of Cash Equities;by 2023,it was 2.5x the size of Cash at$25 billion.As the market matures,a similar model could emerge in Liquid Credit(or Prime Services could expand its reach)to serve credit funds,market makers,and other market participants in more holistic ways.The path will depend on t

92、he ultimate level of integration between the Liquid Credit and Private Credit service models,as discussed in more detail in the following section.2.B.The Private Credit value shiftOver the past several years,borrowers have realized the benefits of rapid access to capital from a single counterparty o

93、n bespoke terms,and investors have sought to diversify allocations into longer-term investments that generate attractive yields and match their invest-ment profile.Direct lending by Private Credit managers has estab-lished itself as a viable competitor to broadly syndicated public markets.Borrowers

94、tend to be small to medium-sized companies,with average EBITDAs of$30-40 million and 5-7x debt to EBITDA ratios comparable to single B through CCC borrowers in public markets,according to Morgan Stanley Research.Yields are typically over 150bps higher than single B loans,with higher annualized retur

95、ns and lower volatility.This makes Private Credit an attractive alternative to public fixed income markets for asset owners looking to match longer-term liability durations.As assets under management have grown and the investor base has diversified,Private Credit managers have continued to grow dire

96、ct lending(i.e.,general purpose and acquisition lending to sponsor-backed,middle market corporates)and the range of investment structures has broadened(e.g.,business development companies,separately managed accounts,retail Private Credit funds).These shifts have driven 14%growth in Private Credit Au

97、M over the past five years,reaching$1.6 trillion in 2023 based on Preqin esti-mates.However,taking a more comprehensive view of Private Credit,we estimate the total AuM to be closer to$3.3 trillion.This view includes leverage,assets in non-fund structures,including business development companies(BDC

98、s),and separately managed accounts(SMAs),as well as asset-based financing,infrastructure debt,and real estate debt that are not captured in the often quoted$1.6 tril-lion headline figure.Not all this AuM sits with Private Credit funds leverage via financing lines,which we estimate stand at approxi-m

99、ately$0.6 trillion,has come back to the banks in a new form.M BluePaperMorgan Stanley Research13Exhibit 9:Build up to Private Credit AuM1,$tn,2023AuM tracked by Preqin2Non-fund structures3Asset-based financing4RE and Infra debt funds5LeverageEstimated total Private Credit AuM$1.6 TN$0.5 TN$0.3 TN$0.

100、4 TN$0.6 TN$3.3 TNDry powderDeployed1.Year-end value,excludes funds of funds;2.Net invested assets tracked by Preqin;3.Includes BDCs,SMAs,and Private Credit CLOs;4.Estimated based on disclosures from 20 largest European and US credit man-agers;5.Based on Preqin;Source:Morgan Stanley Research,Preqin,

101、Private Credit firm disclosures,Oliver Wyman analysisSeveral forces are converging to drive Private Credit towards its own inflection point.The banks active in lending to US middle market companies,through traditional commercial and industrial loans or asset-backed finance,face balance sheet pressur

102、e today that may intensify with new capital rules and/or elimination(or softening)of special tailoring provisions for smaller institutions.In parallel,Private Credit managers continue to expand their reach into product areas that have historically been dominated by banks,such as asset-based financin

103、g and infrastructure finance.Finally,the expected rebound in sponsor-backed M&A activity sets the scene for con-tinued growth in direct lending.We expect these forces will sustain Private Credits topline growth through to 2027,while diversifying the underlying breadth of lending activity.Five years

104、ago,Private Credit managers were specialists focused pri-marily on challenging banks in financing middle market sponsor-backed deals(i.e.,direct lending).Today,Private Credit managers are increasingly diversified alternative asset managers focused on cap-turing a broader range of credit activity acr

105、oss the risk-return spec-trum.M BluePaper14Section 3.Risks and Opportunities for Wholesale Banks from the Credit TransformationThis section examines the risks and opportunities for wholesale banks from the credit market transformation,including estimated impacts on industry revenues.We consider whic

106、h businesses are under most threat,and which players are best placed to capture the opportuni-ties.As the credit market transformation continues to advance,we see$35-50 billion of existing credit revenues at risk for wholesale banks.This represents 8-11%of the$440 billion credit revenue pool for the

107、se banks today(see Exhibit 11).Given the composition of this rev-enue pool,with less than 10%of total revenues generated by flow credit trading,the rise of private credit is the most significant threat to wholesale banks.It is also the most significant opportunity for growth with Private Credit mana

108、gers emerging as major clients for banks that provide asset origination,asset servicing,fund-and asset-level financing,etc.We project up to$15 billion of incremental revenue growth for the banks who have or can adapt their models to serve these clients.3.1.Risks to wholesale banks from the transform

109、ationBanks have already ceded share to Private Credit managers,particu-larly in middle-market direct lending,which competes directly with the Broadly Syndicated Loan(BSL)market dominated by the lever-aged finance teams of investment banks.This shift has been driven by several factors,including regul

110、atory guidance,2 enhanced capital requirements,3 and liquidity requirements.4 However,banks have maintained their roles within the high-yield bond and BSL markets and remain critical to the broader Private Credit ecosystem.Future shifts will be across two dimensions:(1)penetration into other types o

111、f credit,and(2)expansion outside the US.2.For example,SR13-3 Leveraged Lending Guidelines in the US,ECB guidance on leveraged transactions in Europe.3.For example,high assumed stress losses in CCAR in the US,Pillar II additions through SREP in Europe.4.For example,reserves required on undrawn commit

112、ments.Exhibit 10:Credit product attractiveness and presence of non-bank competitorsSponsor FinanceAcquisition FinanceCommercial Real EstateEmerging Market CreditRelationship LendingTrade FinanceAsset Based FinanceCommercial LendingInfrastructure FinanceFlow CreditHigh barriers to entry for non-banks

113、,bank business not under threatNon-banks have shown significant level of interest due to attractive return,favourable terms and manageable operational intensityNon-bank players have shown high level of interest and already entered the segment,establishing significant degree of maturityLimited intere

114、stHigh interest but limited presence High interest and significant presenceAttractive tonon-bank competitorsMature non-bank competitive footprintExample credit productsImplications for banksLimited impactBanks will maintain competitivemoats,focus is winningshare from other banksRisk of share loss to

115、 non-banksBanks will need to compete withnon-bank players entering themarket to protect their shareStable bank and non-bank ecosystemBanks will need to compete inpockets,and pivot focus towards servicing the non-bank playersSource:Oliver Wyman analysisM BluePaperMorgan Stanley Research15An outsized

116、driver of Private Credits recent growth has been demand from life insurer and reinsurer accounts in the US and Bermuda.In the US,life insurers hold$5.5 trillion of assets,of which approximately 75%are investment grade credit products.Historically,these accounts invested predominantly in public inves

117、t-ment grade corporate and government bonds and publicly traded asset-backed securities.As major alternative asset managers have acquired insurance balance sheets,these investment portfolios have shifted toward a more diversified,higher yielding portfolio including CLOs,commercial mortgages,and limi

118、ted alternatives allo-cations.This trend has more room to run and Asset-Based Finance(ABF)has become the new frontier for insurance balance sheets,allowing Private Credit managers to originate a broader set of assets and place them with insurers through structuring and credit enhancement that make t

119、hese assets suitable for investment.This diverse range of lending includes hard assets,commercial finance,contractual cash flows,real estate,and consumer finance.We estimate the address-able market in US specialty finance alone is$5.5 trillion AuM(see Private Credits Next Act,April 2024).Traditional

120、ly,the vast majority of ABF loans have been originated and held by banks.As competition has increased in direct lending,Credit managers have started entering pockets of the ABF market,given the potential for attractive yields and spreads.Managers with permanent capital insurance vehi-cles have been

121、particularly active in this space,as they leverage their low cost of capital to match asset-liability durations.For example,35%of Apollos total credit AuM is now dedicated to ABF strategies,almost double that of three years ago at$197 billion.Banks will con-tinue to play a key role in origination,wa

122、rehouse financing,struc-turing,and servicing of ABF lending given their entrenched customer relationships but Credit managers will hold an increasing propor-tion of these loans,either originating directly or in partnership with banks.The steady expansion of Private Credit origination in the Americas

123、 sets the lower bound of our estimate for the revenues at risk for wholesale banks.Our upper bound estimate of$50 billion is based on deeper penetration in Europe and Asia,which remain far behind the US in the level of markets-based financing that reaches corporate borrowers of all sizes.In Europe,t

124、his would include greater disinter-mediation of leveraged finance and debt capital markets as direct lending penetration increases,alongside a push into ABF,where Private Credit activity is still nascent.In Asia,this would include heightened pressure on Commercial Bank lending as managers start prov

125、iding asset-based financing to commercial clients.While more headroom exists for Private Credit in Europe and Asia given todays starting point,structural barriers may limit Private Credits penetration in these markets.A key barrier is market frag-mentation and the lack of coordinated government and

126、regulatory support for non-bank lending.In addition,life insurers in many juris-dictions are treated punitively for holding private and structured credit under Solvency II.5 Finally,the heterogeneity of business cus-toms,languages,and industries in the European and Asian markets presents a greater b

127、arrier to entry for Private Credit managers,particularly for those with a historically US-focused operation local Commercial Banks are deeply entrenched and tailored to meet local needs.Managers will be able to lean on sponsor relationships to continue gaining share in direct lending,but penetrating

128、 non-sponsor-backed companies and diverse forms of asset-based financing may be a tougher challenge.5.Solvency II framework based on one-year VaR increases capital required with duration,discouraging investment in long duration credit assets.See“Report on insurers asset and liability management in r

129、elation to the illiquidity of their liabilities”,EIOPA.M BluePaper16Exhibit 11:Wholesale bank credit business revenue pools and base case risk from credit business transformation,$bn,2023DCM(IG)LeveragedFinanceIBDEM CreditFlow CreditAssetFinanceCorporate LendingVanilla LoansLendingMarketsCommercial

130、Real EstateCommercial Lending3050140220Project Finance(incl.infrastructure finance)Asset-Based LendingCommercial Real EstateTrade FinanceAcquisition FinanceCIB:$220 BNCommercial Banking:$220 BNRevenue at riskMinimalLowModerateMediumHighSource:Coalition Greenwich Competitor Analytics 1H24,Oliver Wyma

131、n analysisBy 2027,we expect the growth of Private Credit to be fastest in Europe and Asia,but expect the Americas to remain the most mature and deeply penetrated market due to these structural barriers to growth.M BluePaperMorgan Stanley Research173.2.Opportunities for wholesale banks in the new eco

132、systemDespite the expected pressures on banking credit revenues,new opportunities exist for banks to position themselves as strategic partners,serving the needs of the evolving Credit manager ecosystem.We expect up to$15 billion of incremental revenue will be up for grabs by 2027,offsetting a third

133、of the$35-50 billion at risk from traditional lending fees.This growth comes from both established businesses,and new offerings required by market participants of the future.Exhibit 12:Base case revenue opportunities for banks in supporting the Private Credit manager ecosystem2023-2027 revenue outlo

134、okCIB business involvedRelative growthIncremental revenue Markets(spread)Lending+$8BNSubscription line financing to manage liquidity between capital calls and deploymentLender financing to private credit vehicles,boosting leverage at fund levelWarehouse financing to finance the purchase of assets pr

135、ior to securitizationLoan-on-loan financing to“back finance”senior and first lien debt tranchesGP or ManCo financing to fund managers to grow their fundFinancing IBD(DCM)Markets(spread)+$2BNBroadly syndicated loans that banks originate and distribute,in part to institutional investorsAsset-based fin

136、ance that banks originate,structure,and/or distribute to institutional investorsCLO structuring arranged by banks,distributed to institutional investorsOrigination,distribution,structuring Securities Services+$2BNFund servicing including fund administration,pricing and fund accountingCustodian and d

137、epositary services,providing independent asset oversight and safekeepingFund servicingServicingTraditional loan servicing activity,either performed by banks or third-party providersAsset-based finance servicing that requires actively monitoring and servicing of underlying assetsLoanservicing Markets

138、(macro)+$3BNSecondary trading of loans between private credit funds,and from private credit funds to banksFX and interest rate derivatives to hedge loans against moves in interest rates or currenciesCLO trading facilitated by banksTrading andhedging+$15BN1234Key:Higher growthLower growthSource:Olive

139、r Wyman analysisProviding financing to the Credit manager ecosystem is the largest opportunity in absolute terms and is attractive given lower regulatory capital requirements on exposures to funds vs.individual assets in the portfolio.Financing and leverage are often discussed in broad terms,but in

140、reality private markets financing includes a diverse range of lending solutions,each with different uses and different pricing models(see Box 1).We estimate banks generate$11-13 billion from financing Credit managers today,with managers tapping$0.6 trillion of financing in total.As Private Credit Au

141、M grows,we expect financing requirements to scale proportionally,with spread compression offsetting some of the potential revenue growth reaching$20 billion in revenues by 2027.M BluePaper18Although leveraged finance and ABS revenues are at risk as bor-rowers turn to direct lending and private asset

142、-based financing,banks will continue to play a key role in originating,distributing,and structuring Private Credit assets in partnership with managers.Banks are increasingly shifting toward“originate-to-distribute”(O2D)models to increase balance sheet velocity and retain a share of the economics thr

143、ough origination fees this model sacrifices interest income,but delivers higher overall returns,preserves the client relationship,and creates dynamic distribution networks that banks can leverage to manage risk.This is particularly relevant in asset-based financing,where the high number of diverse b

144、orrowers makes banks the natural point of origination,and the cost and com-plexity of origination poses a barrier to full disintermediation of banks.Having the option to distribute loans to Private Credit man-agers may also allow banks to originate a broader range of assets with different risk profi

145、les,provided they can warehouse the risk and distribute it in an efficient and timely manner.To truly embrace O2D models,risk appetite needs to be broadened to appeal to Private Key Definitions Subscription financing is primarily used as a liquidity tool,allowing funds to bridge the gap between capi

146、tal calls from LPs and capital deployment.Funds can also boost returns by prolonging the use of subscription lines to avoid deploying fund capital even when it is available.This is the largest form of Credit manager financing,representing 30%of total balances,but given the short duration of the fina

147、ncing lines and collateral quality(i.e.,limited partner capital commitments),spreads are relatively tight.Lender financing(also referred to as Net Asset Value lending when referencing Private Equity portfolios)is used to maximize returns at a fund level via leverage.The dynamics here are akin to rel

148、ationship lending,with banks extending lines of credit to funds based on the overall credit worthiness of the fund and its sponsor.Many managers are restricted from using any lender financing or have strict caps.However,spreads are typically high,given the increased flexibility of this type of finan

149、cing(and the transparent economic benefits).We estimate that lender financing makes up 20%of total balances,but banks earn 25%of their Credit manager financing revenue from this segment.Warehouse financing is used to finance the purchase of assets that will eventually be securitised,typically via a

150、collateralised loan obligation(CLO)structure.Managers often structure this through a Special Purpose Vehicle(SPV),and upon the closing of the CLO transaction the SPV repays the warehouse financing used to structure the security.CLOs can either include Private Credit assets or Liquid Credit assets.In

151、 2023,Private Credit CLO issuance accounted for 20%of total CLO issuance.Loan-on-loan financing is used by Credit managers to“back finance”senior and first lien debt tranches,allowing managers to keep higher yielding mezzanine and second lien tranches with more attractive return profiles.This is mos

152、t used by funds with mezzanine and unitranche strategies,but also by managers investing in asset-based financing who will underwrite a whole loan and refinance portions into the banking sector.The scale of loan-on-loan is comparable to subscription at 30%of total balances,but this is concentrated in

153、 a subset of funds focused on the strategies outlined above.GP or ManCo financing is used to unlock capital for management teams or to finance a manager to grow.This is a relatively small segment,typically aimed at newer and smaller managers.Claims on management fee cash flows serve as collateral.Cr

154、edit investors,with clear delineations in risk management and reporting between hold versus for sale originations.Beyond origina-tion,banks will capture upside from structuring and distributing Private Credit CLOs.While the total revenue captured by banks in origination,distribution,and structuring

155、is relatively large at$7-8 bil-lion,we expect more modest growth in this segment,as CLO issu-ance growth remains in the low single digits and asset-based financing origination grows from a low starting point.As Private Credit AuM grows,so does the revenue potential for ser-vicing these assets,at the

156、 loan,fund,and SPV levels.Revenue pools for servicing should broadly track with assets,offset partially by modest fee compression.However,the upside for banks is more nuanced:while banks may seem well positioned to capture loan ser-vicing revenue,given their proximity to the underlying assets and es

157、tablished technology and operations,both supply and demand side factors limit the potential for growth.On the supply side,many banks are looking to exit loan servicing due to the complexity of ser-M BluePaperMorgan Stanley Research19vicing off balance sheet assets and the thin margins in return.On t

158、he demand side,managers often prefer independent loan servicing pro-viders,as they are wary of having their loans serviced by potential lending competitors.In contrast,fund servicing has no such conflicts,and banks are well positioned to perform servicing activities given their multiple existing tou

159、chpoints with sponsors.However,banks are increasingly competing with non-bank servicing providers like Alter Domus,Citco,and SS&C,who were faster to build capabilities serving the Private Credit ecosystem.There are also opportunities for the Markets business to participate in some of the upside too,

160、in the trading and hedging of Private Credit assets.Secondary fund-to-fund trading of Private Credit assets is the most material new opportunity this is still nascent because most managers hold their assets to maturity,but as innovations in market infrastructure emerge,we expect secondary trading to

161、 become more common.A second driver is the increased need for life insurers to swap their Private Credit assets from floating to fixed rates,to increase duration and match their long-dated liabilities.Multiple banks have already established Private Credit trading desks,and some managers are consider

162、ing building loan trading platforms.Dealers will play a key role in this market,particularly given the illiquid and bespoke nature of the underlying assets.Closer to home,banks stand to capture revenue from facilitating CLO trading and continuing to hedge manager exposures through foreign exchange a

163、nd fixed income derivatives.Finally,banks can leverage relationships with Private Credit man-agers to optimize their credit portfolios via significant risk transfers(also known as credit risk transfers).While this is not a new revenue opportunity,these transfers help banks create balance sheet capac

164、ity,and allow them to continue serving clients financing needs across the risk spectrum while selectively holding loans on their own balance sheet to maturity.This market is relatively mature in Europe,but is growing rapidly in Canada and the US,and expanding into new asset classes across the globe(

165、for more details,see Expanding the portfolio management toolkit,June 2024).The expected disruptions and opportunities look likely to reshape the way banks compete and partner with the Private Credit universe.Although the path ahead is full of uncertainty,banks will need to rethink their credit strat

166、egy,operating model,and coverage model to remain competitive.3.3.Net impact on the CIB industry outlookThis is a dynamic market and the business models of the new players in Liquid and Private Credit have not been tested by extreme market shocks,a prolonged downturn,or a risk management failure that

167、 threatens a major player.Setbacks will come.However,we see con-siderable evidence(e.g.fundamental shifts in market structure,sec-ular demand for fixed income assets)that the general trend toward this new market structure is locked in.This will put significant rev-enue at risk for banks:we estimate

168、that$35-50 billion of credit reve-nues could shift out of the banking industry by 2027(see Exhibit 13).This shift is relatively balanced between CIB businesses($25-30 bil-lion)and Commercial lending businesses($10-20 billion).However,the opportunity for banks to capture the upside in this evo-lution

169、 skews almost entirely toward the CIB business.Banks with strong sponsor business models and well-established distribution networks are most likely to benefit from the shift in the market,tap-ping into the enormous demand for asset origination,structuring,servicing,and financing from a new set of ma

170、rket participants.There is a lot to play for:we estimate that up to$15 billion in incremental revenues could materialize by 2027.The traditional powerhouses in CIB are best-positioned for this shift today,but there are natural syn-ergies between the capabilities(and market insights)in Commercial Ban

171、king that may allow smaller CIB businesses to carve out a stronger position in CIB than they have in the past.The net impact of these shifts is relatively small,reducing industry-wide revenues by$10-15 billion(2%)in our base case scenario.However,these shifts will throw far more market share up for

172、grabs and may allow some early movers to grow their advantage in the business or reverse years of underperformance.Exhibit 13:Expected base case net impact of credit business transformation on wholesale banking revenue pools,$bn,2027FTotal impactRevenue opportunitiesRevenueat risk+1-3+13(10-12)IBD a

173、nd Markets(2-3)+2(4-5)Transaction Banking andSec.Services(10-12)-(10-12)Lending(10-15)+15(25-30)Corporate andInstitutional Banking(10-20)-(10-20)Commercial Banking(20-35)+15(35-50)Total wholesale bankingSource:Oliver Wyman analysisM BluePaper20Exhibit 14:CIB revenue soft landing outlook including ba

174、se case impact of credit business transformation,$bn,2019-2027FProjectedScenario ASoft Landing1381311321311251201201171164949505357605860629686881061231191161131145663787368787679803948504044525561666710178112998891848179951237167851019698FY19FY20FY21FY22FY23FY24FFY25FFY26FFY27FIBDMacroSpreadEquitie

175、sTransaction BankingSecurities ServicesLending524572599585584602617610618Note:Forecasts do not include credit losses.Source:Coalition Greenwich Competitor Analytics 1H24,Oliver Wyman analysisM BluePaperMorgan Stanley Research21Section 4.The Role of Wholesale Banks in the Future LandscapeThis section

176、 examines the changing role of banks in the credit markets,framing four key debates that we expect wholesale banks will face as they adapt to the shifting landscape.The role of banks in the credit ecosystem is evolving.Banks have tra-ditionally dominated the value chain for credit end-to-end.Banks e

177、xtend credit to borrowers from their balance sheet,service assets through the life of the agreement,and selectively distribute risk to other banks and institutional investors.This remains the dominant model in the market today,but new structures are gaining momentum as banks face increased balance s

178、heet pressure and inno-vations allow new intermediaries and investors to enter the space.Bank-intermediated models,often referred to as“originate-to-dis-tribute”models,have existed for some time,most commonly in the form of bond origination or securitization.Banks continue to own the borrower relati

179、onship but originate credit assets on behalf of inves-tors,who ultimately hold the risk and earn the interest income.True disintermediation of banks remains limited,but this trend has become more common over the past 10-15 years,particularly in the US market.Specialized asset managers have entered v

180、arious parts of the credit ecosystem,most notably in direct lending to sponsor-backed companies,with bank-like origination,servicing,and distribu-tion capabilities.These players often rely on banks for financing and risk management,so banks continue to play a role even when disin-termediated from th

181、e traditional credit value chain.Exhibit 15:Three parallel models for clients to access credit in todays landscapeBorrowerNon-bank platformsDepositorsDirect/private placementTraditional bank fundingBank-dominatedBanks originate,service and fund productson balance sheet,and distribute to theirwealth

182、and asset management clientsBank-intermediatedBanks facilitate origination&distributionof products via traditional syndicationor Private Credit partnershipsBank-displacedBanks are bypassed by non-bankfunding bodies who provide direct financingto clients and distribute credit productsPartnershipsSynd

183、icationFlow of fundsTraditional wholesale bankAM/WMPrivate funding(Insurers,Pension funds,Private Credit funds and BDCs)Bank origination,structuring&distribution teamsSource:Oliver Wyman analysisAs these broad models evolve,we see four key debates that will shape the role banks play in the future la

184、ndscape.M BluePaper22Debate 1:Should banks reorganize their credit businesses?Coverage models for clients and other market participants in credit are relatively fragmented today.Banks have historically operated several businesses that provide financing to sponsors and corporates and assets,liquidity

185、,leverage,and ancillary services to institutional clients.The arrival of non-bank disruptors in Liquid Credit(market makers)and Private Credit(alternative asset managers)requires banks to rethink their client coverage and service model.The key question is how to make this transition:should banks dou

186、ble down on collaboration between existing teams covering the credit market today,or reorganize teams around this opportunity by moving toward a model resembling Prime Services?Several factors will shape each banks decision-making process:Conviction on the end-state:If the Liquid Credit market struc

187、ture eventually resembles that of Equities,and non-bank liquidity providers become entrenched,reorganization will help banks meet these players increasingly sophisticated needs.Effectiveness of current collaboration models:Banks with multiple,well-established teams working together effec-tively to s

188、erve non-bank players are likely to preserve existing structures and focus on expanding services through collabo-ration,without the pain and inefficiencies of more funda-mental reorganization.Starting point and pressure on the existing model:Banks with a limited presence or less capacity to maintain

189、 tradi-tional credit businesses can(and likely should)explore more radical shifts toward integrated,product-agnostic approaches to provide financing to borrowers,source assets for investors,and support the evolving ecosystem.The strongest banks in credit today possess the broadest and deepest capabi

190、lities to adapt to the new environment,but they also face significant hurdles,such as deeply entrenched business models and cultures,and legacy revenue streams to defend.Some banks with a lighter footprint in credit may be able to move faster.But we are a long way from the extreme versions of this e

191、volution in liquid and private markets:An“open architecture”model,where a unified coverage team presents a menu of financing options from inside and outside the bank A“prime services”model,where a unified coverage team offers dynamic market access,alongside financing and risk management We may never

192、 get all the way to these extremes,given the unique structure of the credit and broader Fixed Income markets,but the banks that push furthest will have natural advantages and less risk of disruption in any future scenario.Debate 2:How important are Wealth and Asset Management?Many universal banks ha

193、ve well-established Wealth Management and Asset Management businesses,with some having built a strong footprint in Private Credit.However,these businesses operate rela-tively independently of other credit businesses in the bank today.Asset Management divisions can offer Private Credit investment opt

194、ions,raising capital from institutional investors for direct lending or other strategies such as asset-based financing.Of the US GSIBs,Goldman Sachs was the early pioneer in Private Credit and now runs a hybrid model that deploys bank capital while ramping up third-party capital through fund,separat

195、ely managed account,and co-in-vestment structures.A strong Private Credit franchise within Asset Management allows the Corporate and Institutional Bank to offer in-house Private Credit solutions to their clients,alongside access to public market financing and lending from other Private Credit man-ag

196、ers through partnerships.This maximizes value capture across the group and strengthens client relationships.While Private Credit capabilities within Asset Management are not a prerequisite for suc-cess and can create conflicts when partnering with other Private Credit managers,we expect banks with t

197、hese capabilities to compete more effectively for origination flow.Wealth Management divisions can tap private markets demand to offer Private Credit managers,both internal and external,highly sought-after wealth capital.On the demand side,banks can charge higher intermediation fees on private marke

198、t assets,and the longer investment horizon may support client retention.Private Credit assets are particularly attractive to wealth clients due to their poten-tial for higher returns and lower volatility compared to traditional asset classes,and as an effective portfolio diversification tool.On the

199、supply side,banks can place wealth capital with leading Private Credit managers to form deeper relationships,with potential bene-fits for the CIB business from servicing the managers(see Section 3.2.M BluePaperMorgan Stanley Research23Opportunities for wholesale banks in the new ecosystem).While ban

200、ks stand to retain the most value by connecting their Wealth client capital with bank-managed Private Credit funds,there are limi-tations to this given the heightened concentration risk and potential reputational damage should returns fall short expectations.Banks are making rapid progress toward de

201、epening their Private Credit footprint in both Asset Management and Wealth Management,but it remains to be seen how effectively Corporate and Institutional Banking and Commercial Banking businesses can tap into these potentially deep pools of capital,and how Asset and Wealth Management businesses ca

202、n leverage the banks origination capabilities.We expect the most successful banks will create the ability to collaborate across these different businesses,but stop well short of building“closed systems”that may create the perception of conflicts and deter third-parties from partnering with the bank.

203、Debate 3:Do exclusive partnerships have a future?As Private Credit managers increase their assets under management(AuM)and diversify beyond direct lending,building new routes for origination becomes increasingly important to(1)provide sufficient opportunities to deploy capital and(2)originate opport

204、unities aligned with new strategies(e.g.,asset-based finance).Partnering with banks to access their origination networks is one way to achieve this objective.In turn,banks see the opportunity to defend client relationships and monetize extensive origination networks in a capital efficient manner,lea

205、ding to significant growth in origination partnership announcements over the past three years.Most recently,Apollo announced partnerships with several banks,including a$25 billion lending deal with Citigroup.Exhibit 16:Number of bank and Private Credit manager partnerships announced,2021-2024 YTD145

206、92021202220232024 YTDSource:Public disclosures,Oliver Wyman analysisM BluePaper24Despite the recent surge in partnerships,the strategic rationale behind many of them remains unclear,and the outlook for these col-laborations is uncertain.There are challenges on both sides:For banks,partnerships,espec

207、ially exclusive ones,may erode the power of their broader distribution capabilities.For managers,the pace and rigidity of the bank origination process,particularly during periods of stress,may limit their ability to meet expectations.For both parties,the mechanics and economics of holistic Private C

208、redit origination partnerships are untested,espe-cially during significant credit downturns where losses mate-rialize,and aligning origination flows to the risk appetite of the investment partner is challenging.We expect partnerships to play a role,especially in products requiring broad origination

209、networks and ongoing servicing,such as asset-based financing.However,not all partnerships are created equal,and many may fail to meet their promise.The bank may also provide portfolio company financing to the under-lying asset.These multiple overlapping exposures are difficult to track,as the financ

210、ing is often provided by different parts of the bank or by different banks.In addition,many exposures are tranched,increasing the importance of having robust analysis to calibrate the thickness and pricing of each tranche.A lack of historical data for specific managers or whole asset classes creates

211、 further challenges.“Originate-to-distribute”models bring their own complexities,with a risk of misaligned incen-tives inherent to O2D models,and a different approach needed to manage pipeline risk.Finally,todays credit ecosystem has developed against a largely benign corporate credit conditions ove

212、r the last 10 years.An uptick in default rates and asset markdowns could have unforeseen conse-quences,given the increasing complexity and interdependencies of market participants.Private Credit managers are not subject to the same level of regulatory scrutiny as banks,and most funds have not operat

213、ed at scale through an extended downturn or recession.While sweeping regulation for Private Credit managers is unlikely,regula-tors will continue to push for greater visibility of asset creditworthi-ness,and a comprehensive view of financing received from banks.In 2021,the EU introduced leverage cap

214、s for open-ended funds(175%)and closed-ended funds(300%),marking a first step to control bank exposure to Private Credit managers.While the credit default outlook is difficult to predict,we anticipate banks will continue to bolster their risk management capabilities with respect to Private Credit,le

215、veraging technology to help unpick and manage the complex network of risk exposures.Were credit con-ditions to deteriorate,we expect the banks with the most integrated models and robust risk analytics(that can capture concentrations across clients,sectors,and end borrowers)to weather the storm and p

216、osition for significant market share gains in the recovery.Debate 4:How can banks manage evolving risks in the new credit ecosystem?The evolving credit landscape is changing the type of risks banks need to manage,posing new challenges.Bank exposures are now often one step removed from the underlying

217、 assets,making credit analysis and line of sight through to risk exposures through the cycle more challenging.In a single sponsor-owned company,a bank might have multiple sepa-rate lines of financing contingent on credit risk of the underlying asset.For example,a bank may provide lender financing to

218、 a Private Credit manager,who then provides a NAV loan to a private equity sponsor,which also receives a subscription line from the same bank.M BluePaperMorgan Stanley Research25Section 5.Conclusion The credit market evolution is reshaping the role and positioning of wholesale banks.While the outloo

219、k for wholesale banking performance remains generally positive,the rise of non-bank players in Liquid and Private Credit presents both risks and opportunities for wholesale banks.As banks navigate these shifts,there are four key actions that management teams should take to protect and grow the econo

220、mics of their credit business.Exhibit 17:Management actions for wholesale banking executivesRationale and actionsLever Wholesale banks need to holistically diagnose their current position across the credit ecosystem Once the baseline is clear,banks need to define their credit ambition and appetite f

221、or change vs.current state Adapting the bank credit business will take time,resources and management alignment Winners will have long-term view of the market outlook and willingness to invest in streamlining the businessAssess credit positioning and set ambition1 Credit businesses at banks tend to b

222、e highly siloed,with products and coverage split across desks and divisions Appetite for change will shape how far banks should evolve their credit coverage and operating models At a minimum,banks will need to cover credit managers more closely and systematically to be competitive in the evolving la

223、ndscape The most ambitious banks may consider more radical reorganisation to better cover borrowers and credit managersAdapt the coverage and operating model2 Building partnerships with credit managers is one way of establishing a foothold in the highly competitive market The approach to partnership

224、s should be linked to the target credit operating model choices Banks can either take a preferred access approach to partnerships,or adopt an open model Designing partnerships with clear objectives and scope is key to ensure two-way value to both banks and credit managersDefine partnerships strategy

225、3 Credit ambition and capital strategy will influence whether banks opt for a more capital light or intensive operating model As banks adapt their credit business and grow their exposure to private credit,they will face a new set of credit and regulatory risks Financing the emerging private credit e

226、cosystem will reinforce the need for visibility on underlying assets,industries and client segments Adapting originate-to-distribute models can help banks manage risk while still participating in upside from the credit ecosystem growthSet creditcapital andrisk framework4Source:Oliver Wyman analysisW

227、e believe each of these actions is essential.The undeniably significant political shifts witnessed across the world will clearly impact the intensity of financial regulation and the pressure on bank balance sheets.However,we believe the rise of Liquid and Private Credit is locked in now Private Cred

228、it has become an investible asset class,liquidity has been manufactured in the bond markets,a new ecosystem of market participants have emerged,and banks have found pathways to extend the traditional credit model and deliver attractive economics.The big question now is how to play these trends.M Blu

229、ePaper26The information provided herein was prepared by Morgan Stanley&Co.LLC(Morgan Stanley)and Oliver Wyman Limited(Oliver Wyman).It is not investment research,though it may refer to a Morgan Stanley research report or the views of a Morgan Stanley research analyst.This communication does not cons

230、titute a complete fundamental analysis of any companies mentioned.Unless indicated,all views expressed herein are the views of the authors and may differ from or conflict with those of Morgan Stanleys research department.This research report does not constitute investment advice or recommendations a

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