End Of The Big Bank Bonanza

These have been flush times for U.S. banks. This year, they most likely will beat last year’s record profits of $120 billion — thanks to the lowest interest rates in decades and spending by indefatigable consumers, whose transactions account for two-thirds of bank revenues.

Yet the end of Easy Street may be near. Costs for everything from upgrading bank branches to fighting lawsuits and complying with tighter regulations are spiking. Technology expenses alone are rising 6% a year as the need to upgrade computer systems from past acquisitions becomes pressing. At the same time, revenues are taking a hit as interest rates edge up, hurting the mortgage-refinancing and bond-trading businesses. “Banks have seen windfall profits these last few years,” says Nick Studer, head of consultant Mercer Oliver Wyman’s corporate and institutional banking practice. “They’re thinking that they’ve got a business full of good athletes, but in fact they’ve been running downhill.”

Megamergers have bought banks growth and time before — now both are running out. “Banks have spent a lot of money to get a lot bigger, but they aren’t much more efficient,” says Adam Dener, author of a study called The Emerging Crisis in U.S. Banking Profitability and a partner at Capco, a financial services consultancy. “As a result, they now face a business model impasse.”

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