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U.S. banking consolidation expected to continue, TowerGroup says
September 28, 2008
NEEDHAM, Mass. — In the past few weeks the financial-services industry has witnessed the death of the independent investment banking industry, the renewal of the oft-criticized universal banking model, unprecedented action by central banks to stem the tide of a global meltdown, and a proposed $700 million bailout plan by the U.S. government.
On Friday, the long-anticipated acquisition of Washington Mutual finally took place, as JPMorgan Chase quickly won the bid to acquire the bank from FDIC receivership. Now Citigroup has joined the ranks with its announcement to acquire Wachovia's banking operations. According to TowerGroup, the weeks and months to come will bring with them more mergers and restructuring for the U.S. banking industry, even as the drive for greater regulation, transparency and cooperation continues to be debated. At the same time, FIs will return to a focus on more traditional banking activities, as credit terms become tighter, capital is withheld from the market, and economic growth is further stifled. Jim Eckenrode, a TowerGroup banking and payments research executive, says the WaMu deal could be concerning, since Chase will have to deal with the troubled assets on WaMu's books.
In June, WaMu's senior management asserted that potential mortgage loan losses could amount to as much as $19 billion.
And while the deal significantly increases Chase's Retail Financial Services customer base and geographic coverage, to cover potential losses ahead Chase will be looking to raise an additional $10 billion of capital. Chase's loan loss provisions actually declined from the first to the second quarter of this year, but WaMu's provisions increased by almost 79 percent, to total $5.9 billion.
Long story short, TowerGroup expects more national consolidation.
"While most other developed banking markets are consolidated into the hands of five or so top players, the U.S. market has been more fragmented," Eckenrode said. "This consolidation cycle will create another two to three national banks alongside Bank of America and the new Chase. While many thousands of community banks, credit unions, and mid-tier institutions will continue to find success in their markets, the top-tier banking echelon will be far smaller than it is today." The banking industry is on the verge of a new hierarchy, he says, where strong banks will press their advantage with new products and services and new competitors will enter the market as the industry industrializes. The need for greater integration across client databases, risk-management capabilities, and products also will cause bankers to realize they must abandon the cultural silos that have hindered their progress. "That Was the Week That Was: Restructuring the Global Banking Industry One Hour at a Time," is a new research report about the future of U.S. banking authored by Eckenrode.
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