Saturday, September 1, 2007

Business and Industry Intelligence: Money Center Banks

Overview

As of early 2007, commercial banks in the US had total assets of $9,700 billion, and total liabilities of $8,900 billion. Almost 90% of each were due to domestically-chartered institutions.

The ten largest banks control assets of $4,900 billion, $3,700 billion being domestic assets. With the exception of HSBC, all of the top ten are entirely US-owned institutions.

2006 saw feverish M&A activity in the US, with a total deal value of $1,500 billion; activity in Europe was also intense. While private equity firms are increasingly involved, money center banks are still generating substantial revenues through these deals.

The regulatory framework for large banks is due to change, with Basel II compliance likely to demand greater capital reserves, and increase costs. As banks grow larger, the requirement that none should hold more than 10% of the nation's deposits is being seen as restrictive. The fate of this federal cap on deposits may affect banks' organic and inorganic growth.

Citigroup, Deutsche Bank, Bank of America, and HBSC Holdings are all leading players in this sector. They are continuing to adjust their financial product portfolio to client demand, with asset-based loans, for example, showing a rapid increase in popularity. M&A is a common strategy for players to expand, especially into lucrative overseas growth markets.

Key Issues

Basel II - The Basel II framework is an internationally agreed set of rules for assessing the adequacy of a financial institution's capital reserves in relation to the risk of assets such as loans.

Basel II compliance could force a bank to maintain higher capital reserves than previously, and may also increase costs by requiring greater investment in areas such as IT services. In most countries, those banks that need to comply with the new rules have an early-2007 deadline, while in the US, this has been put back to 2008.

Deposit Limits - Federal law currently restricts individual banks from holding more than 10% of the total deposits in the US. While most banks are not close to this limit, Bank of America, with more than 9% of total US deposits, is urging the government to remove this limitation. Removal of the limit could affect the degree of consolidation in the industry, allowing larger institutions to merge.

M&A Activity - 2006 saw record levels of M&A activity in many industries in the US, with total deal value of approximately $1,500 billion. Activity in Europe was also strong. It is expected that 2007 will see a continuation of this trend. This should provide continued fee income for money center banks involved in the deals.

Significant Trends

Asset-Based Loans - Asset-based loan balances outstanding grew from $117 billion in 1994 to $360 billion in 2006. They involve revolving credit and loans secured on a company's financial and physical assets, such as accounts receivable or land, in contrast to loans based on cash flow, which can impose stricter conditions on a borrower's short-term financial performance. Commercial banks are increasingly offering such loans, in reponse to demand.

Emerging Markets - Commercial banks are increasing their operations in emerging economies such as China and CEE countries. They are seeking to boost their income through interest on substantial loans, the fees associated with IPOs, and the provision of other financial services.

Consolidation - Within the banking sector, consolidation is continuing. For example, late 2006 saw the merger of Bank of New York with Mellon Financial in a $16 billion deal. Larger players are likely to be looking to acquire overseas banks going forward into 2007.

The money center banking industry consists of all banks specializing in international fund transfer as well as those that borrow from and lend to governments, corporations, and other banks. Values quoted refer to commercial banks with substantial involvement in these activities, but may include results of consumer banking and other operations.

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