An Analysis of the Banking Industry

1
An Analysis of the Banking Industry

• Prepared by
• Seth Axthelm
• Jill Cremeans
• Ryan Ellis
• Eric Hedrick
• Kelly Jones

2
History of the Banking Industry

• The U.S. banking industry is worth about 520
  billion
• There are more than 9,100 commercial banks

3
History of Banking

• 1929 - Depression Hits
• Fed realized that it could not sustain its policy
  of setting below market interest rates and low
  requirements
• Fed raised interest rates, which led to the Stock
  Market crash

4
History of Banking

• 1933 - Glass Steagall Act
• Authorized deposit insurance and restricted
  banks ability to engage in debt and securities
  underwriting
• Allowed banks to earn up to 5 of revenues from
  securities underwriting
• It was revised in 1989, 1996, and is currently
  under scrutiny

5
History of Banking

• 1970s
• Consolidation is not an option for U.S. banks
• Banks started to group together to form one bank
  holding companies and to get away from the
  government regulations with out actually breaking
  them

6
History of Banking

• 1970 - 1985
• Regional Superbanks begin to emerge
• Congress relaxed the requirements imposed by the
  Glass-Steagall Act
• Industry moved away from Savings and Loans and
  towards other services

7
History of Banking

• 1985 - Present
• Megabanks began to arise
• Banks began to right size their organizations

8
Are Banks Really Banks Anymore??

• Banks are offering more services and want to be
  called Financial Services Companies
• Banks are venturing into brokerages, insurance
  and securities underwriting
• Banks are coming up with strategies to appeal to
  overseas customers

9
Federal Deregulation

• In the past 25 years there has been gradual
  relaxation of government regulations
• There have recently been two major pieces of
  legislation
• Reigle-Neil Interstate Banking and Branching
  Efficiency Act of 1994 (effective 1997)
• Gramm-Leach Bliley Act of 1999

10
Reigle-Neal

• Essentially removes state borders
• Provides for mergers and acquisitions
• Creates high competition
• Leaves no room for inefficiency

11
Intra-Industry Consolidation

• Banks must not only maintain, but expand
• Consolidation is the most efficient way
• Bank Benefits
• No competition from merged or acquired bank
• Additional market share
• Increased financial leverage
• Increased number of offered services
• Consumer and economic benefits
• Best banks will thrive
• Better services
• Better management of investments
• Inefficient banks will fade

12
Gramm-Leach Bliley

• Makes traditional bank endangered species
• Companies in three separate financial industries
  are allowed to merge and acquire each other

13
Inter-Industry Consolidation

• Ability to provide a full offering of financial
  services
• Diversity allows for stability during harsh
  economic conditions

14
Citigroup

• Anticipated future and merged
• Citibank and Travelers Group
• Revenues up
• High stock value

15
Concerns

• Glass-Steagall repeal could allow conditions for
  another depression
• Consolidation could give too much economic power
  to banking industry

16
Banking and Wall Street

• Stock value has been an increasing focus for bank
  success
• Banks are moving to a high-margin line of
  services geared to please Wall Street

17
Regulation

• Regulation occurs at both the state federal
  level
• Federal level regulators
• FDIC (Federal Deposit Insurance Corporation)
• Established in response to the Depression
• Federal Reserve
• Conducts monetary policy by influencing money
  credit conditions

18
Banks Financial Service Co.

• The SEC (Securities Exchange Commission)
• Regulates bank broker-dealer functions
• The Department of Justices Anti-trust division
  enforces anti-trust rules

19
Global Banking Trends

• Expansion of banking throughout the world is
  becoming more prevalent
• United States
• Borders have been removed due to relaxations in
  regulations
• Worldwide trend
• Consolidation of banks due to
• Improvements in technology, aggressive
  competition and need for reduction in costs

20
Trends

• In order to keep the business of companies
  competing on a worldwide level, banks are
  following them into new locations
• Asia
• Economies are slowly turning around
• Decreasing currency value and banking
• Japan
• Yen will remain stable helping to resuscitate
  Asias economy and banks
• China
• In economic turmoil with 22 months of deflation

21
Trends

• Latin America
• Currently in a recession hitting banks hard due
  to a lack of money in the economy
• Europe
• Economy is expected to pick up this year
• Interest rates are likely to pick up making the
  cost of funds rise, creating a slight setback for
  banks
• US
• Many banks are moving to the global level with
  improvements in technology and the opening of
  many European, Asian and Latin America economies

22
World Trade Organization

• Created possibilities for the globalization of
  the banking industry
• WTOs Financial Service Agreement
• Leaves the door wide open for global financial
  services
• The new Financial Services Agreement
• Allows commercial presence of financial service
  suppliers by eliminating or relaxing of foreign
  ownership of local financial institutions

23
Technology

• Two reasons banks want to get on the internet
• To be seen as a leader as well as starting a
  presence in the cyber universe
• To be able to compete in customer retention in
  response to the competition from non-traditional
  companies

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Benefits to getting on the Internet

• Internet banks are open 7 days a week, 24 hours a
  day
• Less expensive to run
• Self-service banking
• Get to know customer better
• Opportunities to sell things other than
  traditional banking services
• Increased competition

25
Advantages to non-bank institutions

• No brick and mortar stores
• Larger possible customer base
• More attractive interest rates
• Banks will have trouble competing, offering
  services both online and in their branches

26
New Channel or New Business?

• Banks must make the Internet a new channel for
  customers to receive services
• Non-bank institutions have turned online banking
  into a new business

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What are banks to do?

• Internet traffic doubles every 100 days
• Must offer services online or be left behind
• An increasing proportion of your customer base
  is going to migrate across channels, and theyre
  either going to migrate with you or from you. If
  you dont cannibalize, then somebody else is
  going to eat your lunch for you
• -Daniel W. Latimore, Mainspring Inc.

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Conclusion

• Change
• Scramble for banks to move into the future with
  the use of the available technology
• Banks have to follow the trends of today or be
  left behind in the past