Banking Industry Predictions for 1995: Opportunities and Challenges Ahead

Strategic Insights -

As the banking industry heads into 1995, management consultants at Towers Perrin are predicting a severe primary spread squeeze for U.S. commercial banks, driven by increased competition from non-bank loan origination and demand for investment-quality loan-backed securities. The consultants also expect mortgage origination volumes to remain below 1993-94 record levels, leading to further challenges for thrift institutions. However, they see opportunities for banks that can capture economically attractive new customers and invest in technologies like the Internet to expand their retail network.

Key Takeaways:

  • U.S. commercial banks will face a severe primary spread squeeze in 1995 due to increased competition from non-bank loan origination and demand for investment-quality loan-backed securities.
  • Mortgage origination volumes will remain significantly below 1993-94 record levels, putting pressure on earnings for thrift institutions.
  • Banks that can capture economically attractive new customers will have opportunities for growth, but will be hindered by high-cost funding infrastructures and falling economic performance.
  • Merger and acquisition activity will be driven by cash-rich international financial services conglomerates seeking to acquire mid-sized institutions with assets between $1 billion and $20 billion.
  • The Federal Reserve will continue to hike interest rates throughout 1995, driving up the prime by 300bps by the end of the fourth quarter.
  • Bank-run mutual fund programs will struggle to meet targets and will be replaced by mutual fund companies or asset managers.
  • "Bank at home" programs will re-emerge using technologies like the Internet, while "Bank at Work" programs will expand through 401(k) record-keeping services.
  • Consumer loyalty levels will trend downward in 1995 as consumers become aware of rising total costs and seek better deals.
  • Regulation changes will focus on bank participation in insurance sales, which will be ratified by Congress as a fait accompli.
  • The Southern California economy will be jolted by acquisitions, with two big California thrifts likely to be acquired by banks.
  • Risk financing will grow within wholesale banking, with commercial lending-like vehicles mutating to serve risk financing functions.

Statistics:

  • 300bps increase in prime rate by the end of 1995 (Towers Perrin prediction)
  • $1 billion to $20 billion asset size range for mid-sized institutions vulnerable to merger and acquisition activity (Towers Perrin prediction)
  • 500 bank-run mutual fund programs struggling to meet 1994 targets (Towers Perrin prediction)
  • 5,000 staff members and over 70 offices for international management consulting firm Towers Perrin
  • 600 financial institutions served by Towers Perrin on five continents
  • 50 Fortune-ranked commercial banks served by Towers Perrin
  • 1993-94 record levels of mortgage origination volumes expected to be significantly below in 1995 (Towers Perrin prediction)

Sources:

  • Towers Perrin press release, January 9, 1995
  • Towers Perrin press release, January 1995
  • Towers Perrin website, 1995 (archived)