The Evolution of Banking Activity: Strategic Options

The progressive liberalisation of capital movements and the global dimension assumed by the financial markets in the eighties have resulted in a world-wide structural change in the credit Industry. The euphoria of a simple market place with a plethora of global players which predominated to begin with has given way to a more sober and differential approach with the end of the economic boom.

There is a review of the current situation of banks and a strategic options estimation.

The ongoing process of deregulation and liberalisation of financial services markets implies more commercial opportunities and at the same time more intense competition with banks and non banks. Customers will ask for more advice and problem solving. As the interest rate margin narrows due to a «pincer movement» on the asset and liability side, profits from interests rates will drop. Commissions and fees will make a greater contribution to earnings than in the past.

The new international capital requirement has obliged banks in some countries to contain the growth of their risk assets and/or to take on new capital resources.

Statutory provisions on banks tend to move away from market forces and more stringent requirements are imposed on banks for prudential reasons. Further international standards are likely to be adopted with respect to market risks (interest rate variations, currency and position risk).

The higher cost of refinancing on the liability side has led banks to commit themselves more to credit segments which earn higher interest, but, at the same time, involve higher risks; therefore risk control must be improved. This will include efficient internal control systems, which provide information on branch, country and individual risks quickly and act as an early warning system.

The narrowing of profit margins and rational cost management will further encourage the process of concentration; but the assumption that the future main trend will be towards the concentration of banks into increasingly large financial conglomerates is now contested, even if this trend can be observed; despite economies of scale, structures of this kind are not necessarily more efficient and profitable than smaller banks; banks still have adequate potential for concentrating on commercial activities and exploiting financial niches which bring the best prospects of profit.

Experts assume that, while having a wide range of business opportunities at their disposal, banks will be more inclined to select only those they regard as best suited for their specific needs.

There are the following strategic options: diversification versus specialization, consolidation on the domestic market versus further foreign expansion, product orientation versus distribution orientation, internal development versus Mergers and Acquisitions, joint venture and co-operation agreements, major Institutions versus medium and small operators.

For all-purpose banking, as we know it in Continental Europe, further diversification will involve the development of all round financial business with the addition of insurance and savings accounts, leasing, factoring, electronic banking products and management consulting.

On the other hand specialisation implies a concentration on selected business areas. The all purpose banks may come to abandon certain market segments for profitability reasons ; because a profit centre approach service units will be turned into subsidiary companies with resulting specialisation.

Credit institutions which operate internationally generally pursue a two fold aim of consolidating their domestic market position and achieving further growth on major foreign markets. If, for reasons of profitability, a choice has to be made, priority will be given to home market through widening the product range and rationalising the branch network.

Further expansion abroad often suffers from a lack of access to customers deposits implying a dependence on expensive money to develop. So banks tend essentially to concentrate on corporate finance business for the subsidiary companies of their customers, investment banking and asset management activities.

The production and the selling of banking services are traditionally one operation but cost reasons have lead to a rethinking of this. When a bank has a dense distribution network, it is in the bank's interest to place more products with their customers against commission payments this is why they conclude co-operation agreements. When a new product has to be introduced, the bank has to find the best solution between making and buying from a cost and marketing point of view.

A market position at home and abroad can be strengthened by the development of banks own branches or subsidiaries, the acquisition of holdings, mergers with banks joint venture agreements between domestic and foreign banks or co-operation agreements on strategic alliances between banks.

To-day, size itself is not a condition for survival. Niche operators offering a special high quality range of products and pertinent advice have proved extremely profitable. Major companies find themselves obliged to review their organisational structures and ensure the necessary flexibility and national adaptation to the needs of customers.