Industry Research Prepared by: Angus Christina Crystal Henry Rita Sally
Introduction ¡ Global Trend ¡ Competition between investment banks and commercial banks ¡ Profitability of banks ¡ Conclusion
Global Trends • Advanced technology (e. g. E-banking) Reduce manual work Reduce number of banks Integrate some banks’ branches Difficult for small banks to survive due to lack of resources
Global Trends • Deregulation Border of services started to break down Similar products provided by different types of banks Competition between financial institutions increase • Change of corporate behaviour raise fund in capital market instead of borrowing from banks Commercial Bank earn less profit Tendency to merge Why?
Reasons for merger ¡ Diversification of services and credit risk ¡ Provide more synergy effects Reduce cost Increase efficiency Decrease redundancy Share knowledge
Competition Between Investment Banks and Commercial Banks
Reasons of the Increasing Competition of Banks 1. Development of Security Markets 2. Attractive Profit in the Security Business 3. Expansion in Banking Services to Clients 4. Deregulation in Banking Act (in US) 5. Comparative Advantage of Commercial Banks
1. Development of Security Markets - corporate borrowers raise funds directly through capital markets - demand for traditional commercial banking service - CBs expand to fee-intensive activities
2. Attractive Profit in the Security Business - Hefty fee and commission in investment activities
3. Expansion in Banking Services to Clients - Banks already have close contacts with a large base of business and municipal customers - Providing commercial services - Expand to investment bank services -maintaining the existing level of client base
4. Deregulation in Banking Act (in US) - CBs are governed by Glass-Steagall Act 1933 Limitations on CBs’ participation in security activities Deregulation - Gramm-Leach-Bliley Act 1999 CBs can engage in more financial activities
5. Comparative Advantage of Commercial Banks - Having lending relationship with issuers - Superior knowledge on issuers’ financial information and conditions CBs have a lower cost of information time spent on research
Profitability study Profitability on US bank
Recovery Period ¡ During the period 1992 to 1999, the bank’s performance was good. ¡ Sound management and risk control
Year 2000 ¡ Net earning of US banks slightly decreased ¡ Decrease in Ro. E (return on equity) ¡ Rises in outstanding bad loans ¡ Increasing M&A activity ¡ Number of banks has fallen from 12, 300 in 1990 to 8300 in 2000
Year 2001 ¡ Again slowdown in profitability ¡ Rise in bad loans (increase 10%) ¡ Low demand for loan (low income)
Conclusion ¡ Changes of the banking environment Bank has more opportunities to develop
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