Study Says Watch for Profit Crisis

The U.S. banking industry is in the early stages of an increasing business and profit crisis, according to a new research paper from Capco, a global financial services and technology solutions company.

"The Emerging Crisis in U.S. Banking Profitability," says that compared to other industries, banking's return on equity is well below average while operating costs continue to rise. The paper also says banks are ineffective in their use of the tools designed to manage change.

The paper says that:

• Bank profitability is compressing and isn't high enough to offset inadequate expense side management.
• Operational efficiencies are lagging despite rising investments in IT.
• IT leverage, M&A, re-engineering and outsourcing must be used more strategically to have a positive effect.

Specifically, the paper says profitability gains for banks will be around 1 percent annually over the coming years and that the compression will start in 2007. It also said industry revenue growth will rise by 5 percent over the coming decade, which is "nowhere near high enough" to offset inadequate expense management. It said that cash and deposits are shifting out of the U.S. into other financial instruments and that float (which it says has been used for more than half of bank revenues) is being pressured by the migration to electronic payment.

Copyright © 2004 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 14, No. 10, 12/04