Transaction banking revenue growth in 2024 'highly dependent' on interest rates

Global transaction banking revenue growth in 2024 would be "highly dependent" on interest rate levels as major central banks are poised for cuts later in the year, Eric Li, a research director at Coalition Greenwich, said in an interview.

"The normalization of rates is clearly going to have an impact on transaction banking because in the last two years revenues were driven by [rising] interest rates globally," according to Li.

Revenues at the world's 10 largest transaction banks rose 25% year over year to some $47.3 billion in 2023, reaching its highest level on record, as shown by the latest sector report of Coalition Greenwich, a research company owned by CRISIL, an S&P Global company.

The revenue growth in 2023 was driven by a surge in cash management revenues fueled by the high interest rate environment, Coalition Greenwich said.

Trade finance revenues declined in 2023 "due to weakened global trade, a drop in commodity prices and an increase in the cost of financing," Coalition Greenwich said.

The company tracks the performance of Bank of America Corp., Barclays PLC, BNP Paribas SA, Citigroup Inc., Deutsche Bank AG, HSBC Holdings PLC, JPMorgan Chase & Co., Société Générale SA, Standard Chartered PLC and Wells Fargo & Co.

Rising net interest income resulting from higher rates boosted the banks' revenues across regions, with Asia-Pacific recording the strongest revenue increase in 2023 of 36%, the Coalition Greenwich data shows.

The rapid rate hikes done by major global central banks, including the US Federal Reserve, the European Central Bank and the Bank of England, in 2022 and 2023 were aimed at fighting rising inflation. As inflation started to ease in late 2023, the market expected rate cuts as early as the second quarter of 2024, yet central banks have signaled that rates would remain higher for longer.

Fewer cuts mean better transaction banking revenues. However, Coalition Greenwich's central case is for a slight decline in 2024 revenues, versus the strong 2023 result. Independently of this, business payment volumes continue to grow.

Yet it is difficult to gauge where 2024 sector revenues will land without knowing how many cuts the central banks will announce by the end of the year and whether the cuts will be synchronized across the Fed, the ECB and the Bank of England, Li noted.