Global banking industry to see more restructuring and consolidation

In the past few weeks the financial services industry has witnessed the death of the independent investment banking industry, the renewal of the often-criticized universal banking model, unprecedented action by central banks to stem the tide of a global meltdown, and a proposed $700 billion bailout plan by the US 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. Today, Citigroup announced that it will acquire Wachovia's banking operations.

New research from TowerGroup finds that the weeks and months to come will bring more mergers and restructuring for the US banking industry, even as the drive for greater regulation, transparency, and cooperation continues to be debated. At the same time, financial institutions 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, Banking & Payments Research Executive at TowerGroup, notes the following regarding both recent merger activity and the macro changes reshaping the banking landscape:

TowerGroup believes that the WaMu deal, while significantly increasing the customer base and geographic coverage of JPMC's Retail Financial Services business, is not without concerns. The combined institution will take its place alongside Bank of America as a truly national consumer banking franchise. However, Chase will now be left 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.

To cover for potential losses ahead, Chase will be looking to raise an additional $10 billion of capital. While Chase's loan loss provisions actually declined from the first to the second quarter of this year, WaMu's provisions increased by almost 79 percent to $5.9 billion. Additionally, the new Chase will embark upon a 2-year merger conversion process that TowerGroup believes will result in a more effective technology footprint than that deployed by Washington Mutual.

TowerGroup believes that more national consolidation is to come. While most other developed banking markets are consolidated into the hands of five or so top players, the US market has been more fragmented. 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.

TowerGroup believes the banking industry is on the verge of a new hierarchy. Strong banks will press their advantage with new products and services; new competitors will enter the market as the industry industrializes; and the need for greater integration across client databases, risk management capabilities, and products will cause bankers to realize they must abandon the cultural silos that have hindered their progress toward make the whole greater than the sum of its parts.

(This is press release of TowerGroup dated Sept 29, 2008)

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