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• W314854608 abstract "It's official, lending is out, asset management is in. Seriously that was the sobering message presented during a recent presentation by Gerard Cassidy, senior bank analyst at RBC Capital Markets, Boston. Cassidy, who has been reading the financial services tea leaves for many years, concludes that the future looks brightest for fee-based banks. Time will tell if he's right, but his reasoning is well-worth considering. In a presentation at ABA's recent Trust and Wealth Management Conference, Cassidy backed up his message with ample statistics which pointed broadly to three key factors: 1. the continuing shift away from bank loans to other sources of credit, 2. the end of the period of unusually favorable credit quality and low reserves, and 3. the aging of the Baby Boomers, which is creating a sharply increased market for asset management. On the first point, Cassidy pointed to the long-running migration of corporations from bank borrowing to commercial paper, the dominance of captive auto lenders, and the continued rise of mutual funds as evidence of a secular trend away from the traditional bank lending model (Exhibit 1). This puts pressure on net interest income (Exhibit 2, page 8). And even though interest income is still the larger revenue source industry wide, the trend is clear. He predicts better earnings per share growth for fee-based banks--banks that emphasize asset management, trust, custody, and other fiduciary services-than for banks with a traditional deposit/loan profile. This will especially be true as mortgage lending and home equity lending slow and are not offset by increases in commercial lending. Adding to the earnings pressures for traditional lenders, he said, will be the increase in reserves needed to compensate for deteriorating credit quality and increased credit risk. Cassidy acknowledged that traditional banks can do better in some years than fee-based banks when credit quality is excellent, as it has been recently, but that situation is likely to change. As asset quality deteriorates, all banks will suffer from higher credit losses. Cassidy doesn't believe conditions will be like those of 1990 again, but more challenging than it's been in many years. A tail wind will change to a headwind, is how he put it. Regarding the third factor, the aging Baby Boomers have the wealth right now, he said, and will continue to be the beneficiaries of a huge transfer of wealth from their parents. Increased health-care costs will detract from this to an extent, but Cassidy still predicts the value of managed assets will continue its rise sharply (Exhibit 3). Already a lot of asset managers have been entering the field, he said, and there is starting to be some consolidation. Still, banks that focused on fee services have outperformed the industry as a whole. Cassidy showed results for several of these institutions (Exhibit 4, page 10) and focused in particular on Mellon Financial Corp. As Exhibit 5 shows, the dramatic shift of the Pitts burgh-based bank away from lending and retail banking has led to sharply improved performance numbers. As a comparison, Cassidy pointed to New Jersey's Valley National Bank, a large community bank with a traditional mix of business. The bank is well run and its stock price has improved over the same period ('93 to '05), but not nearly as much. Its noninterest income as a percentage of operating revenue has grown from 10. …" @default.
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• W314854608 date "2006-05-01" @default.
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• W314854608 title "Why Fee-Based Banks Look So Good" @default.
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