What are a Bank’s Business Segments?
A bank’s major business segments are retail banking, wholesale banking, and wealth management. While banks might have different names for the business operations, they still have the same business functions as these three categories. Some larger banks also have business segments outside of the traditional three, such as treasury services or insurance. However, the revenue generated by those segments is small compared to the original segments.
Quick Summary Points
- The three main business segments for a bank are retail banking, wholesale banking, and wealth management.
- Retail banking or personal banking involves deposits, mortgages, loans, and credit cards.
- Wholesale banking is related to sales and trading and mergers and acquisitions
- Wealth management generate revenue through retail brokerage and asset management.
Revenue Breakdown by Segment
While the revenue distribution per business segment is different for all banks, the approximation breakdown by business segment is as follows:
What is the Retail Banking Segment?
Retail banking is the largest earnings contributor. It is the segment most people are familiar with, as it includes operations that occur in a bank’s branch. Products involved in retail banking includes deposits, credit cards, and mortgages. This segment is also known as personal banking, as it serves individuals. However, it is also targeted towards small commercial clients.
Revenue from retail banking is split into interest and non-interest origins. Net interest income accounts for approximately 70% of retail revenues. It is calculated by taking the interest collected from mortgage and credit cards and subtracting interest paid on deposits. Non-interest income contributes around 30% of the retail banking segment’s revenue. It is calculated from taking the difference between all non-interest revenue and operating expenses.
The revenues are generated through account fees, transaction fees, credit card fees, and foreign exchange revenues. The fees are often small amounts and relatively unnoticed by the clients. Expenses included in this section are compensation costs and infrastructure costs. They can add up to 50% of a bank’s retail revenue.
What is the Wholesale Banking Segment?
Wholesale banking is the second largest segment for banks. Another name for wholesale is capital markets. This segment deals with corporate and institutional clients and is associated with investment banking. Thus activities include corporate lending, sales and trading, and mergers and acquisitions. Business in the wholesale banking segment accounts for 15% to 40% of overall revenue. This largely depends on the bank and market conditions. This segment is the most difficult to forecast and is usually valued at a lower multiple. The difficulty in forecasting revenue stems from the volatility of markets and the lack of disclosure in transactions.
Trading is a volatile operation that represents 30 – 40% of wholesale revenue. Revenue emerges through realized and unrealized gains and losses on the trading of fixed income, currencies, commodities, and equities. Due to the volatility of the revenue, investors do not reward fast growth or dependence on this segment to drive revenue. Another operation in this segment is mergers & acquisitions. It is very profitable as there are no capital requirements. Revenue depends on the fees, which is around 0.15 to 1.5% of the transaction value.
What is the Wealth Management Segment?
Wealth management is a quickly growing segment for banks. Revenue is generated through retail brokerage and asset management. Wealth management is usually valued at a higher multiple than other segments because of several reasons. It is more profitable due to lower credit requirements, there is lower volatility, and greater growth. Growth is attributed to the changing population demographics. As baby boomers start to save for retirement instead of taking out loans or mortgages, protecting and growing savings become more important. Therefore, wealth management is growing at a faster rate than other business segments.
In terms of revenue, since a majority of the assets management is invested in equities, trading commissions contribute to revenue. There’s been more trading activity in recent years, which increases commissions. However, the short-term increase in trading revenue is a major source of volatility due to its dependence on the equity markets. On the other hand, since management-related fees do not depend on the performance of the market, volatility does not increase.
Advisors that can create and manage strong relationships with affluent clients is especially important in the wealth management segment. As both the trading commissions and management fees depend on the number of clients, it’s important to employ advisors who can fulfill the client’s goals. Stronger relationships also mean that clients are less likely to leave during market downturns. It is up to the advisors to convince clients to continue to trust the bank even when the markets are not doing well.
Thank you for reading CFI’s article on the major business segment for banks. CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep improving your knowledge, we recommend the following resources: