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Investment Analysis of the US Banking Industry : Community Banks and Thrifts to Drive Growth

  • December 2014
  • 61 pages
  • Frost & Sullivan
Report ID: 2575140

Summary

Table of Contents

Executive Summary

The banking industry has changed significantly since the 2008 financial crisis—transforming from high growth to stagnation. Banks that are claimed to be “too big to fail” are facing litigation that translates into huge costs affecting profitability. Most investment banks have either already announced or are scheduled to announce new business strategies or operating models that would make the organizations leaner and more productive and profitable. Several mergers, acquisitions, and spin-off transactions may take place through 2019 as a result of banks’ strategic initiatives to discard their noncore businesses while focusing on and developing core strengths. The industry’s widespread and unavoidable cost-saving measures have included adoption of more efficient technology that reduces turnaround time, conservative risk management practices, salary caps, and layoffs.

Additional costs to comply with Basel III, the Dodd-Frank Act, and other regulations have affected capital base, return on equity, and other operating metrics. Customer centricity, digital convergence, increasing competition, revenue growth struggles, process integration, product innovation, defining new target segments, and changing business models are the real challenges facing the industry. The new banking landscape that meets these challenges will strike a balance between risk and profitability and be more stable, dependable, and sustainable.
This research provides an overall perspective of the US banking industry, including market statistics, business models, products and operating environment, financial strength analysis, and transaction and investment analysis.

Study Objectives

To analyze companies in the US banking industry based on key financial metrics and financial ratios
To identify key performance drivers and restraints that affect the current industry and to develop an outlook for 2015
To identify the best performers in the industry based on financial performance from January 2007 to July 31, 2014
To identify and assess trends in transaction activity such as private placement, public offerings, and mergers
To elaborate best practices of top performers and do a competitor analysis based on financial parameters

Study Scope

The study is based on financial year (FY) 2009 through FY 2013 data for analyzed companies. Numbers for FY 2014 are included based on availability and may not represent actual market figures. The base year is 2013.
Transaction analysis is done from January 2007 to July 2014.
A total of x public companies in the United States were analyzed. The companies were chosen based on consistent availability of data throughout the study period.
Five sets of ratios: profitability management, cost management, capital management, solvency, and liquidity management

Market Overview

The US banking industry continues its path to recovery amid a rapidly changing business environment with new challenges and ever-increasing regulations. Industry growth has slowed sixfold between 2010 and 2013. This decline can be attributed to fewer revenue sources, increasing costs of regulatory compliance and technology convergence, and a silo-type operating structure. The industry is focusing on reducing costs to increase profits, because finding new revenue sources is increasingly difficult. However, cost cutting cannot be a sustainable profitability model. The industry will move to a digital landscape to gain flexibility, increase customer interactions and loyalty, address new customer preferences, strengthen distribution channels at a low cost, and develop a leaner, integrated, and efficient operating model. These changes will bring about a permanent structural shift in operations, profitability, and return. Returns on equity (ROEs), returns on assets, and net interest margins will continue to contract while capital ratios and risk management practices improve, striking a balance between profitability and risk control.
The top x banks account for x % of total banking revenue and x % of total assets in the US banking system. Consolidation could be another growth avenue as large banks acquiring nonbank service providers and small and specialized banks to gain synergies and strengthen core operations. Much of the capital required to pursue such strategies would come from internal sources and the shedding of noncore operations, which would result in a more robust business model suitable for survival in the hypercompetitive environment.
The US banking industry is set to mark a new beginning in its lifecycle and move toward a more sustainable, reliable, and efficient structure while continuing to emerge from the 2008 financial crisis.

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