Banks & Credit Unions
Description
Companies in this industry accept deposits and make commercial, industrial, and consumer loans. Major companies include Bank of America, Citibank, JPMorgan Chase, Navy Federal Credit Union, and Wells Fargo (all based in the US), as well as Banco Santander (Spain), China Construction Bank and Industrial and Commercial Bank of China (both based in China), and HSBC Holdings (UK).
Global banking revenue generated about $3.9 trillion in revenue, with commercial banking accounting for a large part of global revenues, according to IBIS World.
The combined industry includes about 110,000 establishments with an annual average revenue of $530 billion.
COMPETITIVE LANDSCAPE
Demand for banking services is closely tied to economic activity and the level of interest rates. The profitability of individual banks depends on marketing skills, efficient operations, and good risk management. Large economies of scale exist in some segments of the industry, which has encouraged industry consolidation. While smaller banks and credit unions can compete successfully in segments where customer service or knowledge of the local market is more important, big banks are becoming increasingly dominant.
The US commercial banking segment is concentrated: the 50 largest firms generate about 70% of revenue.
A decade after the financial crisis of the late-2000s finds the global banking industry on firmer footing, although the recovery hasn't been uniform across all regions. Assets at the largest US banks reached about $12.95 trillion in assets at the end of 2023, according to Bank Rate. Still, the specter of the financial crisis and recession, which resulted in extensive losses, more than 500 bank failures, government takeovers, and involuntary mergers has left its mark on the industry. Although the financial climate has improved and loan demand is strong, persistently low interest rates and increased government regulation have resulted in a prolonged recovery period and increased costs for the industry.
In response, banks have been broadly reducing headcounts and shedding high-risk activities, such as trading on their own accounts, that once powered their earnings. Concurrently, banks are being challenged by a rash of financial technology (aka fintech) startups offering alternatives to traditional banking, such as peer-to-peer online lending, alternative payment systems, and other services. Indeed, many tech-savvy millennials are bypassing brick-and-mortar branches in favor of online transactions and other options.
While fintech companies are driving innovation in financial services, they've yet to capture significant market share. Global technology giants, including Amazon, Google, and Facebook, pose a greater threat to banks, according to the World Economic Forum. Their expertise in critical technologies such as cloud computing, customer-facing artificial intelligence, and "big data" consumer analytics opens the door to competition with banks in the future.
The growth of international trade has encouraged some US banks to expand to foreign markets, and has also led foreign banks to enter the US market. Some of the biggest US banks, notably Citibank and JPMorgan Chase, have large foreign operations. ING, Santander, and HSBC all have operations in the US.
PRODUCTS, OPERATIONS & TECHNOLOGY
Banks generate revenue from loans to non-financial businesses loans account for about 30% of industry revenue, followed by residential mortgage loans and other products supporting financial services which both account for about 10%.
Commercial banks receive their revenue from both commercial customers and consumers. Revenue comes from the gathering and lending of deposits as well as from fees for providing a wide range of services. Banks are one of the largest sources of real estate lending, including home mortgages, land commercial construction loans, and commercial mortgages.
Savings institutions, also known as thrifts, include savings banks and savings and loan associations. Under tight oversight, savings institutions are largely restricted to investing in US treasury securities or mortgage-backed securities. Typically larger than credit unions, the main purpose of thrifts is to provide mortgage loans to homeowners, funded by consumer deposits. Many thrifts are becoming increasingly diversified, and offer an array of financial products and services, such as retail banking operations and commercial lending.
Credit unions are not-for-profit, tax-advantaged banking entities owned by their depositors. Like thrifts, credit unions' principal source of deposits is personal savings. Unlike thrifts, credit unions have traditionally made small consumer loans rather than mortgage loans. However, credit unions are increasingly making first mortgages and auto loans. Most serve employee groups or "affinity" groups such as neighborhood associations, and are consequently small.
The biggest operating concerns for most banks are service and loan production (sales); funds acquisition (deposits and borrowed funds); risk management (the quality of loans and investments); interest rate management (correctly pricing loans, deposits, and services); liquidity management (timing differences in the maturity of loans and deposits); and transaction processing. In a bid to reduce costs and boost profitability, the six largest US banks have cut thousands of jobs since the Great Recession, while shedding less-profitable business lines and trimming compensation. Industry-wide, employment since the Great Recession at commercial banks, credit unions, and savings institutions have rebounded as banks emerged bigger after the recession.
Global banking revenue generated about $3.9 trillion in revenue, with commercial banking accounting for a large part of global revenues, according to IBIS World.
The combined industry includes about 110,000 establishments with an annual average revenue of $530 billion.
COMPETITIVE LANDSCAPE
Demand for banking services is closely tied to economic activity and the level of interest rates. The profitability of individual banks depends on marketing skills, efficient operations, and good risk management. Large economies of scale exist in some segments of the industry, which has encouraged industry consolidation. While smaller banks and credit unions can compete successfully in segments where customer service or knowledge of the local market is more important, big banks are becoming increasingly dominant.
The US commercial banking segment is concentrated: the 50 largest firms generate about 70% of revenue.
A decade after the financial crisis of the late-2000s finds the global banking industry on firmer footing, although the recovery hasn't been uniform across all regions. Assets at the largest US banks reached about $12.95 trillion in assets at the end of 2023, according to Bank Rate. Still, the specter of the financial crisis and recession, which resulted in extensive losses, more than 500 bank failures, government takeovers, and involuntary mergers has left its mark on the industry. Although the financial climate has improved and loan demand is strong, persistently low interest rates and increased government regulation have resulted in a prolonged recovery period and increased costs for the industry.
In response, banks have been broadly reducing headcounts and shedding high-risk activities, such as trading on their own accounts, that once powered their earnings. Concurrently, banks are being challenged by a rash of financial technology (aka fintech) startups offering alternatives to traditional banking, such as peer-to-peer online lending, alternative payment systems, and other services. Indeed, many tech-savvy millennials are bypassing brick-and-mortar branches in favor of online transactions and other options.
While fintech companies are driving innovation in financial services, they've yet to capture significant market share. Global technology giants, including Amazon, Google, and Facebook, pose a greater threat to banks, according to the World Economic Forum. Their expertise in critical technologies such as cloud computing, customer-facing artificial intelligence, and "big data" consumer analytics opens the door to competition with banks in the future.
The growth of international trade has encouraged some US banks to expand to foreign markets, and has also led foreign banks to enter the US market. Some of the biggest US banks, notably Citibank and JPMorgan Chase, have large foreign operations. ING, Santander, and HSBC all have operations in the US.
PRODUCTS, OPERATIONS & TECHNOLOGY
Banks generate revenue from loans to non-financial businesses loans account for about 30% of industry revenue, followed by residential mortgage loans and other products supporting financial services which both account for about 10%.
Commercial banks receive their revenue from both commercial customers and consumers. Revenue comes from the gathering and lending of deposits as well as from fees for providing a wide range of services. Banks are one of the largest sources of real estate lending, including home mortgages, land commercial construction loans, and commercial mortgages.
Savings institutions, also known as thrifts, include savings banks and savings and loan associations. Under tight oversight, savings institutions are largely restricted to investing in US treasury securities or mortgage-backed securities. Typically larger than credit unions, the main purpose of thrifts is to provide mortgage loans to homeowners, funded by consumer deposits. Many thrifts are becoming increasingly diversified, and offer an array of financial products and services, such as retail banking operations and commercial lending.
Credit unions are not-for-profit, tax-advantaged banking entities owned by their depositors. Like thrifts, credit unions' principal source of deposits is personal savings. Unlike thrifts, credit unions have traditionally made small consumer loans rather than mortgage loans. However, credit unions are increasingly making first mortgages and auto loans. Most serve employee groups or "affinity" groups such as neighborhood associations, and are consequently small.
The biggest operating concerns for most banks are service and loan production (sales); funds acquisition (deposits and borrowed funds); risk management (the quality of loans and investments); interest rate management (correctly pricing loans, deposits, and services); liquidity management (timing differences in the maturity of loans and deposits); and transaction processing. In a bid to reduce costs and boost profitability, the six largest US banks have cut thousands of jobs since the Great Recession, while shedding less-profitable business lines and trimming compensation. Industry-wide, employment since the Great Recession at commercial banks, credit unions, and savings institutions have rebounded as banks emerged bigger after the recession.
Table of Contents
- Industry Overview
- Quarterly Industry Update
- Business Challenges
- Business Trends
- Industry Opportunities
- Call Preparation Questions
- Financial Information
- Industry Forecast
- Web Links and Acronyms
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