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Things have changed for the better at most banks in 1995. According to the German business magazine «Capital», Deutsche Bank’s corporate banking division made a solid risk adjusted performance of 845 million DM, 1.4 billion DM more than in 1994. Its lending volume with companies has risen to 190 billion DM worldwide.

But, nevertheless, corporate banking in general faces serious problems. The governing trends, the threats and opportunities of corporate banking, especially lending, are as follows:

— Right now we are experiencing a series of structural changes in the world‘s economies. Tomorrow‘s business world will look totally different from what we see today. Corporations will have to face different needs and challenges, and the banks must be prepared to help them manage this process of change. This will require more than only lending money.

— Banks have seen profit margins decline for years. Since reliable and sustainable interest earnings are desperately needed to cover losses from bad loans, banks are more threatened by credit risks than ever before. The interest margins should be calculated in a way that properly represents the risk associated with the respective loan; in other words, the margin also serves as a kind of assurance premium for bad loans. With ever shrinking profit margins, lending — which has been a very stable and calculable business in the past — becomes ever more volatile.

— Lending to large corporate clients with an excellent credit rating shrinks both in volume and in the quality of the credit portfolio. This is due to the fact that companies with a very high level of creditworthiness do not have to look for loans to get the funds they need. They can easily tap the capital markets and raise equity at the stock exchange or issue bonds. This often comes cheaper than taking a loan from the bank. The traditional part of the bank as an intermediary for capital is less and less required. So banks are left to hand out an increasing proportion of loans to such companies that can not afford to raise money in the capital markets.

— This has a negative impact on a bank’s loan portfolio because the bank is left to lend money to less creditworthy clients. The bank’s management is challenged to develop and implement strategies to counter this threat, otherwise the shrinking profitability of its credit business could even lead to being downgraded by the rating agencies — which in turn would make it more expensive for the bank to refinance its loans: A vicious circle that would be hard to break.

— There are a number of new competitors entering the banking market. Internationalization and globalization as well as the deregulation of the European banking sector have caused foreign banks to aggressively enter the once sheltered domestic markets of their competitors. So German companies found that British banks were eager to do business with them, and the biggest German banks, on the other hand, bought banks in other European countries to expand to new markets. So, over the years, Deutsche Bank has bought commercial banking networks in Italy, and Spain has been offering a wide range of banking products to local corporate clients. By now, almost every important German bank has bought a British investment bank in order to make up for their own shortcomings in this field. Industrial giants like car manufacturers or retailers have founded banks of their own which now do the largest part of their distribution financing. Even one of bankings oldest services, i.e. doing payment transactions, has come under attack from computer companies who operate data and telecommunication networks of their own which enable them to perform cashless payment transactions better and cheaper than many banks. Banks will have to respond to this challenge that is posed especially by companies who provide access to the world wide web on the Internet.

— Telecommunication in general and the Internet will change forever the ways business is done in many industries. This opens up thrilling opportunities for banks who by their very nature are masters of securely handling large amounts of data via their banking networks. If banks succeed in utilizing their data processing and networking capabilities for their clients, they can enter new fields of business. A continuously growing number of banks already offer their services via the Internet, and the first «virtual banks» have opened «a branch on the Net» where they can readily do business with their clients.

All this leads to the conclusion that the banking industry faces serious strategic challenges. Banking finds itself in the midst of an economic change that could even be described as the next industrial revolution. Doing «business as usual» will not help banks to survive and succeed in this ever faster changing environment. The challenge is to reinvent banking to prepare it for tomorrow’s business world where multinational corporations doing their own banking and financing operations and computer companies performing payment and clearing services pose the question: «Who needs banks any more — and for what purpose?»