It's no secret that the banking industry is smack in the middle of yet another challenging period in its history. U.S. banks' third-quarter earnings releases are rife with announcements of profit reductions, increased loan loss reserves, write-downs of asset values and increasing concerns about credit quality. As might reasonably be expected, these banks also are tightening the belt on noninterest expenses.
Although the full effects of the subprime meltdown are not yet clear, most banks with a diversified balance sheet have seen enough positive earnings in other sectors, and certainly have enough capital in reserve, to weather the storm. However, institutions that have built a business model squarely upon the ability to securitize assets as a key source of funding already have faced some tough times, and these challenges will likely get worse before they get better. Of course, the subprime meltdown is not the only issue at work on banks today. The ever-increasing influence of regulators, the need to build customer advocacy through improved experience at the point of contact and the need to find ways to innovate when banking is largely commoditized are emerging influencers for corporate decision makers.
Corporate breakups and mergers. The current situation has highlighted many weaknesses that were largely hidden during the boom period of the past few years -- some banks will fail and others will take advantage of the situation to gain market share and profit. Given the increasingly activist mentality of shareholders, some banks will be pushed into action -- be it selling to the highest bidder or completely breaking up. Well-capitalized banks will look to continue cross-border expansion into high-growth or high-profit territories, whether that means the BRIC (Brazil, Russia, India and China) countries or the U.S. and EU.
Globalization trends. The global movement of people has been increasing in influence, if not volume. People not only are moving more easily but also keeping in contact more regularly with home and families left behind. Banks will need to respond with innovative products and services, including remittance and credit as well as mobile and stored-value products. Likewise, middle-market and small businesses alike are accessing clients and suppliers from all over the globe and therefore have an increasing need for global cash management and trade finance support heretofore available to only a handful of the largest global corporations.
Sustainability measures beginning to exert an influence. The Green movement is an above-the-fold issue in the press, and banks are in the very early stages of responding to the challenges of sustainability. By contributing to environmental charities, pledging (and in some cases achieving) carbon-neutral status, and launching products such as rate-discounted mortgages for the construction of Leadership in Energy and Environmental Design (LEED)-compliant housing, banks are increasing their commitment to and investments in sustainability.