Greenwich Associates Analyses U.S. Banking In The Period From 2010 To 2015

Between 5% and 10% of U.S. banks will be acquired or otherwise disappear by the end of 2011, according to new projections by Greenwich Associates. By 2015 the number of banks in the United States is projected to fall to

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Between 5% and 10% of U.S. banks will be acquired or otherwise disappear by the end of 2011, according to new projections by Greenwich Associates. By 2015 the number of banks in the United States is projected to fall to 20% below 2007 levels. During the same period, the number of bank branches in the United States will decline by 25% and the resulting disappearance of some 20,000 branch locations will undue much of the past decades expansion.

Those are just some of the conclusions of a new report from Greenwich Associates, U.S. Banking 2010-2015: Two-Steps Forward, One Step Back. Every year, Greenwich Associates interviews and surveys more than 40,000 large corporations, middle market companies, and small businesses about the banks and banking services they use. Based on an analysis of current and historic results, Greenwich Associates concludes that, over the next five years, the U.S. banking industry will be characterized by four trends:

1)

A continuation of more restrictive credit policies put in place by banks during the crisis

2)

A surge in banking industry mergers & acquisitions

3)

A rate of bank failures and government takeovers that remains far above the historic norm

4)

An emerging acceptance of cyber banking relationships that reduce the importance and number of bank branches while allowing banks to compete outside traditional network boundaries

Driving these trends will be sustained pressure on banks from underperforming loans in commercial real estate and other areas, rising costs associated with new regulation and the need for increased capital levels. The same trends will put pressure on banks and limit the recovery in lending, keeping credit in short supply for U.S. companies. They will also combine to cause dramatic reductions in the size of the industry. Many banks with less than $1 billion in assets will be consumed by larger and more financially secure banks seeking efficiencies and scale, explains Greenwich Associates consultant Don Raftery. Smaller banks will struggle with the increased costs of greater regulatory oversight. The group of survivors will likely include more foreign banks that take advantage of industry dislocations to build a significant presence in the U.S. market.

2010: Compressed Margins, Cost Discipline and Risk ControlsBank net-interest margins will compress throughout 2010 as interest rates begin to inch higher, deposits decline to more normalized levels and loan floors give way to growth efforts. With only modest growth in the economy, high levels of unemployment and a continued real estate backlog, growth in bank earnings will be driven largely by management discipline on costs augmenting investment banking and cash management profits. Internal bank culture and power that has shifted over the past twenty-four months will solidify around the risk management function, possibly at the cost of renewed growth.

Banking Beyond 2010Beyond 2010, U.S. banks and foreign institutions will compete in a much-changed industry:

Regulation and market pressure will instill a new degree of separation between traditional depository institutions and risk-taking firms, with increased levels of private equity ownership of banks throwing a wildcard into that mix.

For large and mid-size depository institutions, insurance will become a fully integrated mainstay business, transforming the insurance distribution model far beyond the insurance brokerage arms owned by a few banks today.

Banks will once again be generating meaningful credit capacity through securitization, using a new and improved model in which mandatory risk-sharing and put-back clauses to originators mitigate excessive risk-taking and poor oversight.

The broader application and acceptance of video communication and remote banking transactions will transform bank relationships, decreasing the importance of bank branches and allowing banks and new market entrants to compete beyond their traditional network boundaries.

D.C.

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