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Flat Commercial & Retail Loan Demand Expected to Hinder Banking Revenue Growth

May 29, 2012, 07:00 AM
Filed Under: Banking News

According to the IBSWorld Commercial Banking in the U.S.: Market Research Report, in the five years to 2012, commercial banking industry revenue is expected to grow 2.0% annually on average. According to the FDIC, commercial banks are starting to return to pre-recession profit levels with industry net income increasing at an annualized rate of 2.3% in the four years to 2011 with much of that growth taking place over 2011 (latest available data). However, this growth rate hides huge losses experienced on home-loan defaults that cut industry net income by $12.3 billion at the height of the crisis in 2008.
On the other hand, loan and lease losses have not recovered at the same rate as industry net income and have actually increased at an annualized rate of 42.7% over the same four-year period to $216.6 billion. “This trend is expected to stay consistent with a continued poor housing market,” according to IBISWorld industry analyst Eben Jose. “Despite deposit growth and high corporate profit, flat-lined commercial and retail loan demand, coupled with rising loan write-offs, are expected to hinder 2012 industry revenue.” Revenue is only expected to increase 0.5% to $613.5 billion by year-end.

The Commercial Banking industry landscape changed greatly during the five years to 2012 and will likely continue changing through 2017. Because of the subprime mortgage crisis and the recession, industry contraction accelerated, and the four largest commercial banks, including JPMorgan Chase and Wells Fargo, increased their market share. The subprime mortgage crisis has caused large-scale M&A activity in the banking sector; four out of the top five commercial banks have either merged or acquired larger banks struggling due to losses associated with the crisis, resulting in a leap of concentration within the industry. Although the top four banks’ market share has risen, large losses by major player Citigroup have weakened its individual market share.

“Market concentration is expected to increase over the five years to 2012, as smaller commercial banks are unable to compete against larger commercial banks' diverse products and services,” adds Jose. From 2007 to 2012, the number of commercial banks is expected to decline at an annualized rate of 2.8% to total 6,320. In the next five years, government regulation and technology-driven competition are forecast to dramatically change the business model of banks.

During the five years to 2017, industry revenue will be less volatile than in the previous five years. Commercial banks will continue to benefit from the government's Troubled Asset Relief Program. These "too big to fail" banks will grow deposits at a faster rate than smaller savings institutions, whose reputations were badly damaged by the significant number of bank failures that occurred between 2007 and early 2012.
Read the IBISWorld Commercial Banking in the U.S.: Market Research Report (purchase required).

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