CEP Industry Research 3
Global Trend of Banking Industry
Group 4
Peter Wong Ho Yin
Ken Leung Ngo Hang
Kenny Cheung Kin Yan
Frederick Ho Chu Fai
Global trend of banking industry
The global trend in banking industry includes three distinct topics – consolidation of
institutions, globalization of operations and development of new technologies. All
three are closely related but each has its distinct concerns that will ultimately
determine the fate of the industry as a whole. Let’s discuss the three trends one by
one.
1. Consolidation of institutions
Financial institutions around the world are consolidating at a rapid pace. The number
of institutions is declining, their average size is increasing, and it is common when
new bank merger or acquisition is announced. In the United States, the lifting of
interstate banking restrictions in 1994 triggered a wave of mergers, and European
integration has intensified consolidation in Europe. In many emerging markets, such
as Argentina, Brazil, and Korea, consolidation is also well under way as banks seek to
become more efficient and more resilient with respect to shocks.
2. Globalization
Nor has consolidation been confined by national borders. In a drive that has created
powerful "national champions" in many industrial countries, financial institutions
have not waited for opportunities for growth and increased profitability to be
exhausted domestically before transcending national frontiers. This process of
globalization has been dominated by industrial country banking groups' exploitation
of the growth potential in emerging markets, as witnessed by the expansion of
Spanish banks in Latin America, German banks in Eastern Europe, and U.S. banks in
East Asia. At a somewhat slower pace, cross-border consolidation is also taking place
between industrial countries, initially in the form of strategic alliances that offer some
of the benefits of diversification without the costs of merging different business
cultures.
3. Development of New Technology
Developments in technology, and especially the impressive growth of Internet
banking and brokerage services, have allowed globalization to go beyond the
ownership structure of financial conglomerates and to reach the retail markets. In fact,
many banks are using their online operations to expand into foreign markets, avoiding
the costly process of building retail brick-and-mortar networks of branches. Moreover,
the emergence of alliances between major banks and telecommunications
conglomerates suggests that, in the future, competition in the electronic marketplace
will be fierce. In addition, the appearance of virtual banks and the development of
electronic money for the global Internet market have created the possibility for the
growth of nonbank (and, possibly, largely unregulated) institutions that provide credit
to, and collect funds from, the public. Faster communications require faster reactions
from both markets and policymakers but also quickly make information obsolete.
Increasing competition between investment bank & commercial bank
In the past, the two kinds of banks were doing their businesses separately. Investment
banks were mainly focusing on institutional or high-end investors while commercial
banks were mainly dealing with personal banking services. However, these days, the
competition between investment banks and commercial banks is becoming
increasingly keen.
There is a trend that the commercial banks are beginning to start the businesses that
were previously dominated by the investment banks, including investment banking,
trading & principal investment and asset management. We are going to show some of
the statistics to support that investment banks have been given a bit hit by the
commercial banks in some aspects. We have chosen Goldman Sachs as an example of
investment banks while Bank of America as an example of commercial banks. The
reasons of choosing these two corporations are that they are good representatives of
the respective kinds of banks and they can show the increasing competition between
them.
Investment bank – profitability
Fig. 1 below shows the profitability of Goldman Sachs in last three years. For an
investment bank like Goldman Sachs, the major profit-making activities include
investment banking, trading & principal investments and asset management &
securities. We can notice that the total revenue has been decreasing for three
consecutive years, from $16590 in year 2000 to $15811 in year 2001 to $13986 in
year 2002.
Fig. 1
Revenue ($ in millions)
2002
I. Investment banking
2001
2000
$3836
(↓29%)
6349
$5371
II. Trading and principal investments
$2830
(↓26%)
5249
III. Asset management and securities
services
Total
5907
(↑5%)
$13986
5626
(↑18%)
$15811
4592
(↓12%)
(↓5%)
6627
$16590
If we look in more detail, we can notice that the business of investment banking
suffered a major setback in the two recent years. Fig. 2 shows the categories under
investment banking, including financial advisory and underwriting. Both of these
recorded a large drop with more than 20% drop for each year.
Fig. 2
Revenue (millions)
2002
2001
2000
Financial Advisory
$1499
(↓28%)
$2070
(↓20%)
$2592
Underwriting
1331
(↓25%)
1766
(↓36%)
2779
Total
$2830
(↓26%)
$3836
(↓29%)
$5371
On the other hand, asset management & securities is the only major business that
Goldman Sachs was doing well in the two previous years. We can notice that this part
has recorded a fast growth, especially in the categories of asset management and
commissions.(Fig. 3)
Fig. 3
Revenue (millions)
2002
2001
2000
Asset Management
$1653
(↑12%)
$1473
(↑10%)
$1345
Securities Services
981
(↓13%)
1133
(↑21%)
940
Commissions
3273
(↑8%)
3020
(↑31%)
2307
Total
$5907
(↑5%)
$5626
(↑18%)
$4592
Commercial bank – profitability
As we have mentioned, many commercial banks have been aggressively expanding
their businesses in the field that was mainly done by investment banks. In other to
make a more fair comparison, we have chosen the businesses of a commercial bank –
Bank of America – that are similar to that of investment banks.
Fig. 4 shows the income from investment banking part of Bank of America. Although
it also recorded a drop in income in year 2002 compared with year 2001, the drop was
only 3%. If we compare this amount with that of Goldman Sachs, we can notice that
the corresponding drop of Bank of America is much smaller. What does this imply?
There is a high chance that the expand of business of commercial banks has captured
some of the markets that lead to the large drop in revenue in the investment banking
part. We believe that the wide base of customers of commercial banks is a very
significant factor leading to easy access of securities underwriting and advisory
services.
Fig. 4
Income ($ in millions)
2002
2001
Securities underwriting
$721
(↓9%)
$796
Syndications
427
(↑8%)
395
Advisory services
288
(↑15%)
251
Other
45
(↓46%)
84
Total
$1481
(↓3%)
$1526
On the other hand, Bank of America recorded a little drop in income in the asset
management part.(Fig. 5) If we compare the similar business of investment bank
Goldman Sachs, we can notice that Goldman Sachs was doing much better in this part.
We believe that the reason for this is mainly because that the professionals in
investment banks are more superior than that in commercial banks in the field of asset
management.
Fig. 5
Income (millions)
2002
2001
Asset management fees
$1087
(↓4%)
$1129
Brokerage income
435
(↓3%)
450
Total
$1522
(↓3%)
1579
The prospect of Banking Industry
We expect that the future banking industry will be more and more complicated.
However, the four fundamental trends would be retaining as there is the only way for
banking industry to survive.
In short, the banking sector is entering a new world in which national and institutional
boundaries are becoming less important. Inevitably, supervisory and regulatory
systems will have to adapt their work methods in order to remain effective. The
growing emphasis on risk management, exchange of information, and coordination at
the international level is evidence of efforts to adapt. Nevertheless, some questions,
such as the specific measures to be taken for banks in difficulty, are not easily
answered. Adapting regulatory and supervisory frameworks to rapidly changing
financial markets will remain a daunting challenge and will require further
cooperation between supervisors, markets, and individual market participants.