NEEDHAM, Mass. (9/30/08)--New research from TowerGroup finds that the weeks and months to come will bring more mergers and restructuring for the U.S. banking industry, even as the drive for greater regulation, transparency, and cooperation continues to be debated. At the same time, financial institutions will focus on more traditional banking activities as credit terms become tighter, capital is withheld from the market, and economic growth is further stifled, according to the research. TowerGroup is a research and advisory firm focused exclusively on the financial services industry. Jim Eckenrode, banking and payments research executive at TowerGroup, outlined conclusions about recent merger activity and the macro changes reshaping the banking landscape:
* TowerGroup said that the Washington Mutual (WaMu) deal--in which JPMorgan Chase (JPMC) won the bid to acquire the bank from Federal Deposit Insurance Corp. receivership 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 national consumer banking franchise. However, JPMC 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, JPMC will look to raise an additional $10 billion of capital. While JPMC’s loan loss provisions actually declined from the first to the second quarter of this year, WaMu’s provisions increased by almost 79% to $5.9 billion. Also, the new JPMC will embark upon a two-year merger conversion process that TowerGroup believes will result in a more effective technology footprint than that deployed by WaMu. * TowerGroup said 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 U.S. market has been more fragmented. This consolidation cycle will create another two to three national banks alongside Bank of America and the new JPMC. 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 said it 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 making the whole greater than the sum of its parts.
For more information, go to the TowerGroup website.