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Industry Profile | Banking and Financial Services
Submitted by: Saahil Goel
Historically, banks and financial institutions were loan houses for trading and industrialcorporations. However, in recent times, the banking industry has extended directly to consumers.The main earning source for any financial institution is the difference between the interest paidto its customers on deposits and other investments (mutual funds, bonds, etc) and the interestcharged on loans dispersed by them. Further, banks earn money on the commission it charges for  processing money instruments and facilities provided to consumers (drafts, wire transfers, ATMservices, etc).
The primary activities of companies within this industry are:
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Extension of loans to individual and corporate customers
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Facilitating money transactions – wire transfers and checks
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Providing customers facilities such as debit/credit cards and use of ATMs
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Consumer and commercial financial advising and consulting
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Pension and retirement planning
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Utilization of various banking channels – telephone, online, mail, physicalThere are basically two types of banking institutionsi.
 
Regional banks are those which operate on a smaller scale and are confined to particular regionsii.
 
Are banks at a national level – even though they might have regional branch officesthey deal in international monetary transactions and operate at a much larger scalethan their regional counter partsSome banks can also be classified as investment banks. These banks “underwrite” or guaranteethe sale of stock and bond issues, help corporations undertake mergers and acquisition activities,invest in the stock market for their own earnings.
The management of banking institutions primarily focuses on the following
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Capital Adequacy and the Role of Capital
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Asset & Liability Management
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Interest Rate Risk – affect on risk with fluctuations in interest rates
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Liquidity – as a thumb rule, a bank should have roughly 40%-50% of its assets liquidto maintain liquidity and healthy cash flows
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Profitability – Earnings as compared to the industry benchmark and future growth byinnovation, cost-cutting and/or unique product/services proposition
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Consolidation – through mergers and acquisitions to achieve greater market share andmaintain profitability and competitive advantage
 
 
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Size, Structure, and composition of the industry
Total assets held by banks all over the world amounted to US$ 60.5 trillion in 2005.. The US banks hold about 10-15% of the total worldwide assets held by banks. The United States had themost number of banks (7,450) and branches (75,000) by end of 2005. Japan had 129 banks and12,000 branches. In 2004, Germany, France, and Italy had more than 30,000 branches each. Thenumber of branches in the UK was 15,000 in 2004.Industry leadersGlobal industry leaders ranked on shareholder equity are:Citigroup, JPMorgan Chase, Bank of America, HSBC, Mitsubishi UFJ Financial Group
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General trends and issues
With the advent of internet and mobile banking, retail banking is on the decline. With internet banking, customers can use a centralized location for all their needs at their own convenience.Almost everything which can be done at a retail branch can be done online (sometimes more).There is a marked increase in competition with globalised banking coming into the picture. For example, interest rates in countries such as India (9.5%) are much higher than those offered by banks in saturated economies (2-3% in the United States). This is causing a lot of outflow of capital to various countries as FDI. To take advantage of this situation, banking institutions aretrying hard to have global presence. Also, having global presence allows them access to localemerging markets and hence higher profitability.Banks are trying to consolidate into bigger institutions. Horizontal consolidation is taking placethrough mergers and acquisitions to increase market share. Vertical consolidation is along thelines of providing consumers with a one-stop bank for all their financial needs. Increasingly, banks are trying to partner with other financial services companies such as life insurance, mutualfunds, broking houses, retail investments, real estate investment, portfolio management servicesand pension and retirement fund management companies. This kind of partnership is giving riseto new banking channels – such as
 Bancassurance
– which is the use of the banking channel asan agent for selling insurance policies. This is also going to affect consumers as their loyalty toone particular bank may
 force
loyalty to the financial services that the banks partner with.Banks are very susceptible to changes regulatory bodies in the country where they areincorporated as are all financial services companies. For example, the FDIC (Federal DepositInsurance Corporation) is one of the government bodies in the United States that regulatesactivities within the banking industry. Changes in the policies enforced by regulatory bodies canforce banks to revise their product strategy, growth strategy interest rates on lending and borrowing money.Some of the issues that banks have to face are linked to the market volatility. Since banks areheavily dependent on interest rate fluctuations for their profit margins – they post a major threatto banks. Also, banks are susceptible to over-withdrawal of cash by its customers in which case a bank’s liquidity is threatened. Further, bad debts and non-repayment of loans is a major deterrent
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