IBISWorld Industry Report 52211 Commercial...

WWW.IBISWORLD.COM� Commercial�Banking�in�the�US July 2011 1

IBISWorld Industry Report 52211Commercial Banking in the USJuly�2011� Taylor�Hamilton

Bank on it: After a roller coaster ride, government aid will revive industry revenue

2� About�this�Industry2 Industry Definition

2 Main Activities

2 Similar Industries

3 Additional Resources

4� Industry�at�a�Glance

5� Industry�Performance5 Executive Summary

5 Key External Drivers

6 Current Performance

9 Industry Outlook

11 Industry Life Cycle

13� Products�&�Markets13 Supply Chain

13 Products & Services

15 Demand Determinants

16 Major Markets

17 International Trade

18 Business Locations

20� Competitive�Landscape20 Market Share Concentration

20 Key Success Factors

20 Cost Structure Benchmarks

22 Basis of Competition

22 Barriers to Entry

23 Industry Globalization

24� Major�Companies24 Bank of America Corporation

25 Wells Fargo & Company

26 J.P. Morgan Chase & Co.

27 Citigroup Inc.

29� Operating�Conditions29 Capital Intensity

30 Technology & Systems

31 Revenue Volatility

31 Regulation & Policy

33 Industry Assistance

34� Key�Statistics34 Industry Data

34 Annual Change

34 Key Ratios

35� Jargon�&�Glossary

www.ibisworld.com��|��1-800-330-3772��| ��[email protected]


The industry comprises banks that provide financial services to retail and business clients in the form of commercial, industrial and consumer loans. Banks also accept deposits from customers, which are then used as a source of funding for the loans. Banks

in this industry include banks that are regulated by the Office of the Comptroller of the Currency. Banks that are regulated by the Office of Thrift Supervision are included in the Savings Banks and Thrifts industry (IBISWorld industry report 52212).

The�primary�activities�of�this�industry�are

Receiving deposits from customers and issuing consumer, commercial and industrial loans

52212 Savings�Banks�&�Thrifts�in�the�USSaving banks accept deposits from customers and issue mortgage and real estate loans, as well as invest in high-grade securities.

52213 Credit�Unions�in�the�USParticipating businesses accept members’ share deposits in cooperatives, which are organized to offer consumer loans to their members.

52219 Money�Market�&�Other�Banking�in�the�USAn industry where participating firms accept deposits and lend funds to clients. It includes industrial banks or industrial loan companies, and private banks (i.e. unincorporated banks).

52221 Credit�Card�Issuing�in�the�USThis industry includes businesses that provide credit by issuing credit cards with repayment of the funds being made on an installment basis. Interest is charged on the funds loaned.

52222 Auto�Leasing,�Loans�&�Sales�Financing�in�the�USThis industry is made up of businesses providing sales financing, in combination with leasing, where money is lent to purchase goods though contractual sales agreements.

52229 Real�Estate�Loans�&�Collateralized�Debt�in�the�USThis industry comprises a wide range of nondepository financial institutions extending credit or making cash loans (except credit cards and sales financing agreements).

52231 Loan�Brokers�in�the�USParticipants in this industry arrange loans by bringing borrowers and lenders together, charging fees and commissions to their clients for the provision of these services.

Industry�Definition

Main�Activities�

Similar�Industries

About�this�Industry

The�major�products�and�services�in�this�industry�are

Business lending

Deposits

Home equity loans

Mortgages

Other products


About�this�Industry

For�additional�information�on�this�industry

www.fdic.gov�Federal Deposit Insurance Corporation

www.occ.treas.gov�The Office of the Comptroller of the Currency

www.sec.gov�US Securities and Exchange Commission

Additional�Resources

�IBISWorld writes over 700 US industry reports that are updated up to four times a year. To see all reports, go to www.ibisworld.com


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SOURCE: WWW.IBISWORLD.COM

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Revenue Employment

Revenue vs. employment growth

Products and services segmentation (2011)

58%Deposits

16%Mortgages

15%Business lending

6%Home equity loans

5%Other products


Key�Statistics�Snapshot

Industry�at�a�GlanceCommercial�Banking�in�2011

Industry�Structure Life Cycle Stage Mature

Revenue Volatility Medium

Capital Intensity Low

Industry Assistance High

Concentration Level Low

Regulation Level Heavy

Technology Change Medium

Barriers to Entry Medium

Industry Globalization Low

Competition Level High

Revenue

$570.9bnProfit

$52.0bnWages

$101.8bnBusinesses

6,455

Annual�Growth�11-16

5.5%Annual�Growth�06-11

-2.3%

Key�External�DriversCorporate�profitPrime�rateCompetition�from�substitutesDow�Jones�Industrial�AverageHousing�starts

Market�ShareBank of America Corporation 11.8%

Wells Fargo & Company 11.3%

J.P. Morgan Chase & Co. 7.7%

Citigroup Inc. 5.0%

p. 24

p. 5

FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 34



Key�External�Drivers Corporate profitBusiness sentiment and corporate profit determine demand for credit, the quality of lending portfolios and the level of financing transactions. Therefore, an increase in corporate profit will positively affect commercial banks. This driver is expected to increase over 2011, representing a potential opportunity for the industry.

Prime rateConsumers and businesses are more likely to enter into a loan portfolio when the prime rate is low and the cost of money is reduced. Low mortgage rates boost demand for housing finance; however, a low prime rate also has negative effects because there is lower revenue through interest income for the commercial banking sector. This driver is expected to increase over 2011, posing a potential threat for the industry.

Executive�Summary

The Commercial Banking industry is composed of banks regulated by the Office of the Comptroller of the Currency, the Federal Reserve Board and the Federal Deposit Insurance Corporation. Banks generate the majority of their revenue by accepting customer deposits and then lending these deposits out to individuals and businesses at a higher interest rate. Most macroeconomic factors affect the industry, including employment rates, interest rates, income levels and consumer confidence.

The industry has been on a roller coaster ride since 2006. In the five years to 2011, industry revenue is expected to fall by 2.3% annually to $570.9 billion. Looking closer, the industry has actually experienced three distinct growth phases during the past five years. First, high employment rates, income rates and consumer spending led to strong industry growth in 2005 and 2006. Next, banks experienced massive loan losses as a result of the credit crisis, causing revenue to contract by about 25.0% between 2007

and 2009. Last, industry revenue is expected to recover from 2010 to 2011, increasing at a rate of 9.0% as consumer confidence slowly increases and credit markets gradually thaw.

The industry landscape has changed greatly during the five years to 2011 and will likely continue changing through 2016. Because of the subprime crisis and the recession, the industry has contracted, and the four largest commercial banks have increased their market share. From 2006 to 2011, the number of companies is expected to decline at an average rate of 1.3% annually to total 6,455. In the next five years, increased government regulation is forecast to dramatically change the business model of banks.

During the five years to 2016, industry revenue will be much less volatile than in the previous five years. Commercial banks will continue to benefit from the government’s Troubled Asset Relief Program. These “too big to fail” banks will grow deposits at a faster rate than smaller savings institutions, whose reputations were badly damaged by the significant number of bank failures that occurred between 2007 and 2009. As a result, revenue is forecast to increase at an average rate of 5.5% annually to total $747.0 billion through 2016.

Industry�PerformanceExecutive�Summary�� |�� Key�External�Drivers�� |�� Current�PerformanceIndustry�Outlook�� |�� Life�Cycle�Stage

� Revenue will be less volatile through 2016 as commercial banks benefit from TARP aid


Industry�Performance

Current�Performance

The Commercial Banking industry’s revenue is expected to fall at an average rate of 2.3% annually to $570.9 billion in the five years to 2011; however, this overall decline masks roller coaster volatility that the industry experienced in that time. Three distinct stages have characterized the industry during the period: strong growth in 2005 and 2006, a 25.0% contraction in industry revenue between 2007 and 2009, and

growth in 2010 and 2011. In 2011, revenue is expected to increase at a rate of 9.0%.

Commercial banks earn the majority of their revenue through the interest difference between customer deposits and lent money. Banks accept deposits and place them in savings accounts and products like certificates of deposit where the money cannot be withdrawn for a certain period. Banks pay interest to the depositor on this money and

Key�External�Driverscontinued

Competition from Substitutes Commercial banks are sensitive to substitutes. Competition is high in the banking industry and can come from thrifts, credit unions, government agencies, mortgage brokers and other non-bank organizations that offer financial services. This driver is expected to increase over 2011.

Dow Jones Industrial AverageThe performance of equity markets affects demand for bank lending and the quality of banks’ lending portfolios. A positive development in the stock market will generally result in increased lending due to the “wealth effect” of rising share prices; investors feel wealthier; therefore

they may increase their demand for credit. Rising stock prices will also influence the lending portfolio’s quality because borrowers have an increased ability to meet repayments. This driver is expected to increase over 2011.

Housing startsThe performance of property markets affects demand for bank lending products and the quality of the banks’ lending portfolio. The number of housing starts indicates the overall performance of the residential property sector, which is important because mortgages make up a large portion of banks’ lending portfolios. This driver is expected to increase over 2011.

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Current�Performancecontinued

loan out these deposits at a higher interest rate as mortgages, auto loans, personal loans or small business loans. Revenue is generally calculated as the spread between interest-bearing

accounts and loans. However, macroeconomic factors like interest rates, unemployment, per capita disposable income and personal savings rates affect industry revenue.

Obstacles�arise�despite�recovery

The government spent hundreds of billions of dollars to prop up the Commercial Banking industry and the economy during the recession. From late 2009 to early 2011, those efforts seemed to pay off, but the industry is not out of the woods yet. The consumer credit market is thawing slower than anticipated. The Federal Reserve is between a rock and a hard place, having no way to stimulate the economy by adjusting interest rates, which still remain at an all-time low between 0.0% and 0.25%. Normally, these rates would be advantageous to borrowers (and commercial banks), but the credit markets have taken a turn for the worse due to continued economic uncertainty and the European sovereign debt crisis.

Volatile capital markets coupled with sluggish job growth have increased US consumers’ uncertainty.

As a result, more consumers are putting money into banks or government treasuries, being more cautious than ever to spend. Consequently, the personal savings rate continues to increase. While there is an increase of cash flow into banks, which are considered safe havens for cash, there is a large decrease in the outflow of funds in the form of loans. In 2011, industry revenue is expected to experience its highest level of growth since 2006. Still, the impact of government stimulus money primarily drives this growth rather than organic growth created from banks accepting deposits and approving loans.

Subprime�credit�crisis In the late 1990s and early 2000s, banks relaxed their loan standards significantly. Individuals who could not qualify for mortgages in the past were able to buy homes through subprime lending offered by commercial banks. Subprime lending is the riskiest of mortgage loans, and its borrowers are associated with limited debt history, excessive debt, a history of missed payments, failures to pay debts and recorded bankruptcies.

The decline in lending standards coincided with the rise in adjustable rate mortgages (ARMs), which have interest rates that fluctuate with changes in certain benchmark interest rates and are usually tied to the London Interbank Offer Rate or the prime rate. These loans appeal to borrowers

because they are usually associated with lower initial payments. At the same time, payments can increase with changes to interest rates, so the borrower must be able to plan accordingly. Prior to the subprime mortgage crisis, the quality of borrowers decreased as banks offered loans that individuals were financially unable to maintain. As a result, delinquencies rose sharply starting in 2007 as ARMs reset

� The subprime crisis delivered a massive blow to the industry, forcing banks to write down huge losses



Subprime�credit�crisiscontinued

to higher interest rates, and foreclosure rates increased by 17.7% from 2007 to November 2009, according to the Mortgage Bankers Association.

The subprime crisis delivered a massive blow to the industry. Many banks were forced to write down huge losses by reducing the book value of

assets. The largest four banks wrote down about $79.1 billion on the value of loans, mortgage-backed securities and collateralized debt obligations. This total included a staggering $39.1 billion write-down for Citibank alone. Meanwhile, smaller commercial banks with low capital and revenue failed.

A�change�in�landscape

The negative effects of the subprime crisis drastically changed the industry landscape, moving larger banks to acquire smaller banks. In 2008, savings institution Washington Mutual became the largest US bank failure in terms of assets, and JPMorgan Chase acquired it. In the second quarter of 2008, Wachovia Bank, then the fifth-largest commercial bank, reported a much larger than anticipated $8.9 billion loss. This large write-down destroyed Wachovia’s operations; however, the Federal Deposit Insurance Corporation (FDIC) deemed the bank systemically important to the

health of the economy. Thus, it could not be allowed to fail. Wells Fargo purchased Wachovia for $15.1 billion in stock, greatly increasing its banking presence on the East Coast and in the South.

The industry has contracted as a result of the credit crisis, and the four largest commercial banks have increased their market share since 2006. From 2006 to 2011, company numbers declined at an average rate of 1.3% annually to total 6,455. In 2010, the FDIC closed 157 banks, thus making the number of banks forced to shut down 30.0% greater than the high in 2009.

Government�regulation

In response to the subprime crisis, there has been a raft of new government regulation that has helped and hurt the industry. In 2008, the FDIC’s board of directors voted to temporarily increase deposit insurance from $100,000 to $250,000 through December 2013 in an effort to increase consumer confidence. The increase came in response to a heightened number of consumers that diversified their deposits in multiple banks in order to qualify for the previous insurance limit of $100,000. The increase in FDIC insurance aids the industry by increasing consumer confidence due to higher guaranteed insurance.

The string of recent bank failures has eaten away at the FDIC Deposit Insurance Fund, which is at its lowest level since September 1993. As of the

third quarter of 2009, the fund had a negative balance of $8.2 billion. Consequently, the board of directors voted to require insured banks to prepay 2010 to 2012 premiums in order to replenish the fund. In total, US banks had to prepay about $45.0 billion in 2009. This increased premium cost has hurt smaller commercial banks to a greater extent than larger commercial banks. Regulatory adherence also has increased costs, thus eroding industry profit.

� New regulation has increased insurance for consumers but also raised banks’ premiums



Commercial�banks�grow

The recession’s negative effects have strengthened commercial banks at the cost of savings institutions. Commercial banks and savings institutions equally share the blame for the subprime crisis, but they differ in the repercussions they experienced. Commercial banks have become more multifunctional, thanks to an increase in mergers and acquisitions (M&As). Also, the government identified commercial banks as “too big to fail” and gave them billions of dollars from the Troubled Asset Relief Program. Meanwhile, increased regulation has

pinched savings institutions’ profit, while declining consumer confidence has reduced deposits, due to their small regional nature.

Through 2016, commercial banks’ deposits will grow at a faster rate than savings institutions. Larger commercial banks will continue to use their wide range of products and services, such as wealth management, to attract retail depositors. Commercial banks like Bank of America, JPMorgan Chase, Wells Fargo and Citigroup will also have more clients to market these services to as a

Industry�Outlook

The five years to 2016 will be much different than the previous five years for commercial banks. The economy will continue to recover, helping bolster industry revenue, and growth will be much less volatile than in the past. Commercial banks will continue to benefit from the support of the government; however, they may also be hampered by new regulations. “Too big to fail” banks will grow deposits at a faster rate than smaller savings institutions, whose reputations were damaged by significant bank failures that occurred between 2007 and 2009. During the five years to 2016, the industry landscape will also drastically change because of increased regulation and government oversight.

Industry revenue will grow as employment levels rise and income levels increase. Unemployment levels are projected to fall during the next five years, and IBISWorld forecasts that per capita disposable income will increase between 2012 and 2016. As a result of increased income and a relatively high personal savings rate in the five years to 2016, there will be greater demand for investing cash in checking, savings and other cash accounts. Therefore, banks will be able to keep interest payments on these accounts low.

Consumer confidence and individual and business spending are also projected to increase. Combined with a thawing credit market and rising interest rates from recessionary lows, bank lending is anticipated to rise. With a greater volume of deposit inflows and lending outflows, industry revenue is forecast to increase at an average rate of 5.5% annually to reach $747.0 billion in the five years to 2016, including growth of 6.4% in 2012. Industry profitability will also be much less volatile and is anticipated to streamline, accounting for about 9.5% of industry revenue.

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Commercial�banks�grow�continued

result of the many M&As that took place during the recession. Savings institutions will find it difficult to compete effectively and will be susceptible to failure or acquisition by

national banks. Given these conditions, the number of commercial banks is forecast to grow at an average rate of 1.0% annually to total 6,769 over the five years to 2016.

Regulation�changes�the�landscape

With the finger of blame for the recession pointed sharply at the Commercial Banking industry, increased banking regulation will dominate the five years to 2016. A specific piece of legislation that will weigh on the industry is the Dodd-Frank Bill, named after its authors Senator Christopher Dodd and Representative Barney Frank. The bill will negatively affect the banking industry because it will eat into bank profit through fee reductions, higher compliance costs and the tying up of more capital in trading. IBISWorld forecasts that the bill, if passed, will negatively influence bank profit by about 12.0% in the latter part of the next five years. With higher costs due to meeting new regulations, fees will be passed on to customers. (For more

information on the specifics of the Dodd-Frank Bill, see the Regulation and Policy section of this report.)

Whether this legislation is signed into law or abandoned for other legislation, the government will play a much larger role in regulating the US banking industry. As a result, banks will have less wiggle room, being forced to decide between proprietary trading and their core competency of banking.

� The government will play a larger role in regulating the banking industry and restrict banks’ decisions


Industry�PerformanceUS financial sector growth is slowing compared with emerging markets

Industry consolidation and convergence is increasing

The number of enterprises is declining slowly

Regulation is increasing

Life�Cycle�Stage


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%�Growth�of�establishments

DeclineCrash or Grow?

Potential�Hidden�GemsFuture Industries

Quality�GrowthHigh growth in economic importance; weaker companies close down; developed technology and markets

Time�WastersHobby Industries

MaturityCompany consolidation;level of economic importance stable

Shake-out

Shake-out

Quantity�GrowthMany new companies; minor growth in economic importance; substantial technology change

Key�Features�of�a�Mature�Industry

Revenue grows at same pace as economyCompany numbers stabilize; M&A stageEstablished technology & processesTotal market acceptance of product & brandRationalization of low margin products & brands

Savings�Banks�&�Thrifts

Credit�Unions

Commercial�Leasing

Commercial�Banking



Industry�Life�Cycle Commercial banking in the United States entered the mature stage of its life cycle in the 1990s. During that time, the industry experienced a relaxing of regulatory requirements, which caused increased competition, M&A activity and a decline in the number of commercial banks. Despite this maturity, the industry continues to undergo restructuring. Damage has been done to the banking sector by the subprime crisis. Investment banks and banks heavily involved in mortgage origination have been especially affected. This has allowed some large commercial banks to make large acquisitions, increasing the sector. These acquisitions, as well as the general trend toward consolidation of services within financial markets, are bringing an increasing number of activities under the commercial banking umbrella. This blurring of lines between

different banking activities is expected to continue over coming years.

The industry is facing the prospect of increased regulation. Part government ownership and direct intervention by the government in the dividend and remuneration policies of banks is already occurring.

The maturity of the US Commercial Banking industry can be contrasted to the growth expected in the delivery of financial services in emerging countries. Some US banks are currently retreating from overseas operations as they conserve scarce capital for their domestic market. Also, the European sovereign debt crisis has made many banks wary of their European operations. Despite this, banks are expected to expand their network in emerging economies in accordance with economic recovery. Revenue growth in these countries is expected to be higher than for US banks in the next five years.

�This industry is Mature


Products�&�Services

The Commercial Banking industry encompasses a number of products and services, including deposits, business loans and mortgages.

DepositsThis product segment provides a comprehensive range of products to consumers and small businesses. These products generally include traditional savings accounts, money market savings

accounts, CDs, individual retirement accounts and regular and interest-accumulating checking accounts.

Deposit products provide a relatively stable source of funding and liquidity for commercial banks. Firms earn interest revenue from investing deposits in assets, through client lending and asset and liability management activities. Deposits also generate various account fees such as insufficient-fund fees,

�Products�&�MarketsSupply�Chain�� |�� Products�&�Services�� |�� Demand�DeterminantsMajor�Markets�� |�� International�Trade�� |�� Business�Locations

KEY�BUYING�INDUSTRIES

11� Agriculture,�Forestry,�Fishing�and�Hunting�in�the�US�Establishments in the agricultural sector require financing from commercial banks.

21� Mining�in�the�US�Establishments in the mining sector require financing from commercial banks.

23� Construction�in�the�US�Construction industries often require financing and loans in order to pay for their building and construction activities.

51� Information�in�the�US�These industries are fairly capital intensive, which led to an increase in demand for commercial loans.

KEY�SELLING�INDUSTRIES

52111� Central�Banking�in�the�US�Commercial banks often require liquidity and funding from the Federal Reserve.

53112� Commercial�Leasing�in�the�US�Commercial banks will require rental properties for many of their branch and retail networks.

Supply�Chain

Products and services segmentation (2011)

Total $570.9bn

58%Deposits

16%Mortgages

15%Business lending

6%Home equity loans

5%Other

products



Products�&�Markets

Products�&�Servicescontinued

overdraft charges and account-service fees, while debit cards generate interchange fees. Interchange fees are volume-based and paid by merchants to have the debit transactions processed. Most of all, deposits are the lifeblood of lending for an organization. Commercial banks pay interest on customer deposits and then lend these deposits to borrowers at a higher rate, profiting on the interest spread.

This is by far the largest product segment for banks. IBISWorld estimates that deposits account for about 58.0% of industry revenue. During the recession, revenue from this segment dropped. Banks were able to pay next to nothing for deposits because of the high demand for capital preservation. However, at the same time credit markets were frozen and commercial banks were skeptical to lend out these deposits.

Business lendingBusiness lending includes a range of products and services that are primarily offered to customers via client-relationship teams and product partners associated with the banks. Products include commercial and corporate bank loans and commitment facilities that will cover business banking clients, middle-market commercial clients and large multinational corporate clients. Real estate lending products are likely to be issued to public and private developers, homebuilders and commercial real estate firms. Products also include indirect consumer loans that allow firms in the commercial banking industry to offer financing through automotive, marine, motorcycle and recreational vehicle dealerships across the country.

IBISWorld estimates that this product segment generates about 15.0% of industry-related revenue (revenue tends to be larger for the major commercial banks).

MortgagesMortgage and home-loan products and services are expected to account for an estimated 16.0% of industry revenue in 2011. This is up from 14.0% in 2009, as mortgage markets are expected to continue to thaw as the economy improves.

Mortgage products are typically available to customers through a commercial bank’s retail network, geographic branch centers and sales-account executives and sales-force personnel who offer customers direct telephone and online access to products. Firms also serve customers through partnerships they may have with various mortgage brokers.

In general, mortgage product offerings are for home purchasing and refinancing needs and have fixed or variable rates. Commercial banks manage these mortgage portfolios for asset and liability management purposes, or they repackage and sell them to investors (i.e. CDOs and securitization) while retaining the relationship with the customer.

The mortgage business includes the origination, fulfillment, sale and servicing of first mortgage loan products. Servicing activities primarily include collecting cash for principal, interest and escrow payments from borrowers and accounting for and remitting principal and interest payments to investors and escrow payments to third parties. Servicing income includes ancillary income derived in connection with these activities, such as late fees.

OthersHome equity products include lines of credit and home equity loans that allow people who have equity in the property they own to be used as a means of generating liquidity. Other products include consumer-related business activities that fall within this industry,



Products�&�Servicescontinued

including forms of insurance, card services (although this area is primarily specific to the Credit Card Issuing industry, NAICS 52221) and the allocation of interest

income from loan activities not elsewhere classified. IBISWorld estimates that this segment accounts for about 5.0% of industry revenue.

DemandDeterminants

DepositsThe demand for bank deposits is affected by a variety of different factors, most importantly the real after-tax return on such deposits relative to alternative investments and consumer confidence in the economy.

Commercial banks set the after-tax return on deposits in accordance with the volatility of equity markets as well as consumer confidence in the economy, which determines the demand levels for savings, checking and money market accounts. In bull markets, there is a low demand for savings-type products, and banks have to raise rates to compete with the increased flow of funds into equity investments. In bear markets, commercial banks experience an increase in flow of funds into bank deposits, given their low-risk (albeit low-return) profile.

Consumer confidence is also an important demand determinant for the level of deposits. The more people fear equity markets, the greater propensity they have to put money in the bank.

LoansThe demand for loans is determined by the real after-tax cost of debt relative to the cost of equity. The demand for debt financing typically falls as the real cost of such financing increases. Commercial

and industrial (C&I) loans depend on investment spending by businesses on plant and equipment and other capital goods, as well as financing related to mergers and acquisitions. C&I loans are quite cyclical and tend to fall as general economic activity slows and increase when the economy recovers again.

Commercial real estate loans are largely determined by investment in nonresidential structures, such as multifamily housing, construction and land development, where investments in multifamily housing tend to be more volatile.

The demand for consumer loans largely depends on consumer expenditure, and particularly durable goods expenditure. The demand for mortgage lending depends on conditions such as mortgage rates, house price movements and employment levels. Demand will also be affected by lending standards and the criteria for eligibility for a loan.

The level of interest rates, which represents the cost to borrow, will also affect the demand for loans. Low interest rate levels encourage households and business to take on more debt. This is because the relative cost of consumption through borrowing falls as interest rates fall.



Major�Markets

The major markets for this industry include retail customers; small businesses, corporations and institutional clients; and government clients.

Retail�customersThe retail customer market segment is expected to account for the largest part of a commercial bank’s customer base. Although these customers most often deal in small transaction sizes, the sheer proportion of customer numbers makes this market segment significant.

Consumer and retail customers provide a substantial amount of deposits for commercial banks, where account-keeping fees and investments made on the deposits make these customers highly profitable. Furthermore, with the high degree of competition in the Commercial Banking industry, the ability to attract and retain these customers is considered essential. If a commercial bank has a satisfied base of retail customers, they are then able to market various other products and services to them at minimal costs. Enticing customers to branch out from their primary banking activities (deposits) and purchase mortgage products, fund

management services, credit cards and other banking sectors within that specific company is another way commercial banks cross sell products and bolster revenue.

Small business, corporation and institutional clientsUnlike retail customers, small businesses, corporations and institutional clients deal in a much larger scale of transaction value. Although there may be fewer clients in this category, their dollar value of dealings is substantially larger. Corporate clients require large forms of business lending, and they too deposit cash into commercial banking accounts. IBISWorld estimates that this market segment accounts for 35% of the industry.

Generally speaking, larger corporations and institutional clients will deal with commercial banks whose assets are greater than $1 billion. According to data from the FDIC, commercial banks with assets in excess of $1 billion had a greater exposure to C&I and credit card loans. On the other hand, commercial banking institutions with less than $1 billion in assets had a greater exposure to residential

Major market segmentation (2011)

Total $570.9bn

45%Consumers and retail customers

35%Small businesses,

corporations and institutions

15%Government clients

5%Other clients




mortgages, commercial real estate and agriculture loans.

Government clientsCommercial banks in this industry provide loans to and accept deposits from government institutions. Loans will vary across regions and government departments, but tend to be similar to other market segments and can include various types of real

estate lending, personal loans, auto loans, and various other government-type loans.

OtherOther customers hold a small market share and generally involve a one-off, niche-type transactional service. These customers can be involved in student loan services, retirement services, auto finance and other forms of real estate.

Major�Marketscontinued

International�Trade There are no imports or exports in this industry.


�Products�&�Markets

Business�Locations�2011

MO2.5

West

West

West

Rocky Mountains Plains

Southwest

Southeast

New England

Great Lakes

VT0.2

MA1.3

RI0.3

NJ2.6

DE0.5

NH0.3

CT1.0

MD1.9

DC0.3

1

5

3

7

2

6

4

8 9

Additional�States�(as marked on map)

AZ1.6

CA8.3

NV0.7

OR1.1

WA1.8

MT0.4

NE1.0

MN1.9

IA1.6

OH4.1 VA

3.2

FL6.2

KS1.5

CO1.7

UT0.6

ID0.5

TX6.8

OK1.4

NC3.7

AK0.1

WY0.2

TN2.6

KY2.0

GA3.4

IL5.2

ME0.4

ND0.4

WI2.1 MI

3.7 PA3.9

WV0.7

SD0.5

NM0.5

AR1.6

MS1.3

AL1.8

SC1.6

LA1.7

HI0.2

IN2.5

NY4.9 5

67

8

321

4

9


Mid- Atlantic

Number�of�Establishments�by�Region�(%)�

� Less�than�3%� 3%�to�less�than�10%� 10%�to�less�than�20%� 20%�or�more


�Products�&�Markets

Business�Locations The geographic spread of commercial banking establishments across the United States is vast. Unlike many other industries, there is no single state that holds a large market share of establishments.

In terms of geographic spread by region, the Southeast region has the largest proportion of establishments, estimated at 29.7%. This region includes some major economic states such as Florida (6.2% of establishments), North Carolina (3.7%) and Georgia (3.4%). Comprising 12 states, the Southeast is the largest region by size and population, which somewhat reflects the amount of establishment numbers within the region. The Southeast also generates the most revenue, expected to be about 25.0%.

Although the Mid-Atlantic region holds the third-largest percentage of establishments, at 14.1%, this region generates the second-largest amount of revenue, estimated at 22.5%. The Mid-Atlantic region holds the largest financial state, New York, which is expected to generate about 16.7% of total industry revenue, while only accounting for 4.9% of the total amount of establishments. As the New York region headquarters the majority of the largest banking institutions, this region has been severely affected by the subprime crisis. Many employees have lost their jobs in this region because large financial corporations have had to scale down to cut costs and maintain their bottom lines. Despite this, the region continues to

generate the greatest amount of income and will remain the financial hub of the United States into the future.

Other major commercial banking areas across the United States include the Great Lakes region (17.5% of establishments), with Illinois accounting for an estimated 5.5% of total revenue and 5.2% of all establishments; and the West region (12.2% of establishments), with California generating an estimated 9.9% of industry revenue, with 8.3% of total establishments. The West has also been hit hard by the recession, with California and Nevada being two of the states that have suffered the most from the subprime crisis.

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Establishments Population

Establishments vs. population



Cost�Structure�Benchmarks

The global credit crunch has significantly altered the cost structure of the Commercial Banking industry, most specifically in the loan and lease loss provision expense. As the economy begins to recover from the recession, the cost structure is expected to return to pre-recession proportions.

Loan and lease loss provisionsIn 2011, the loan and lease loss provision is expected to comprise 28.6% of revenue. This is down from 33.0% in 2009. However, it is still high compared to the five-year average of 4.8% between 2002 and 2006.

As the economy continues to improve and loan defaults slow, this expense is

Key�Success�Factors Having a good reputationA firm’s reputation is crucial to attracting new customers and retaining existing customers, and the effects of the recession have made a firm’s reputation even more important.

Membership of joint marketing/distribution operationsRevenue models for commercial banks are based on selling a multitude of bank products to customers.

Superior financial management and debt managementCommercial banks need good processes for managing interest rates, foreign exchanges and operational risk. Commercial banks must maintain a rigorous and conservative risk-management approach. Customer perception of credit worthiness is important.

Ability to raise revenue from additional sourcesCommercial banks need to be able to cope with slower lending growth by increasing noninterest income. Banks may need to make an aggressive push on nontraditional products by providing other financial services.

Economies of scaleReducing unit costs is a key driver of profitability. This has increased as more banks reach economies of scale through increased M&A activity.

Easy access for clientsHaving a strong branch presence throughout the United States makes it easier and more appealing for customers to conduct business with a particular bank and creates more opportunities for banks to sell loans and other bank products.

Market�Share�Concentration

The subprime crisis has caused large-scale M&A activity in the banking sector. Within the commercial banking sector, four out of the top five commercial banks have either merged or acquired larger banks struggling due to losses associated with the subprime crisis, which has resulted in a leap of concentration within the industry. In 2008, the four largest players accounted for an estimated market share of 23.0%. In 2011, this

market share is expected to increase to 35.8%. Although the top four banks combined have increased their market share, large losses by major player Citigroup have weakened its individual market share.

Market concentration is expected it increase over the five years to 2011, as smaller commercial banks are unable to compete against larger commercial bank’s diverse products and services.

Competitive�LandscapeMarket�Share�Concentration�� |�� Key�Success�Factors�� |�� Cost�Structure�BenchmarksBasis�of�Competition�� |�� Barriers�to�Entry�� |�� Industry�Globalization

Level��Concentration in this industry is Low

�IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are:


Competitive�Landscape

Cost�Structure�Benchmarkscontinued

expected to fall to pre-recessionary levels. One area of concern that might hinder the speed to which this expense drops is the defaults that are expected to impact the commercial real estate market.

Interest expenseThe largest cost traditionally incurred by banks is interest expense, which is determined by the amount, type and maturity of liabilities, market interest-rate conditions and competition in lending markets. For banks, the most significant item contributing to the interest expense is the interest charged on domestic deposits. Banks rely heavily on customer deposits as a means of funding for which they have to pay interest to depositors. This has somewhat shielded the industry from the increasing cost of funds through capital markets that other financial institutions have faced. The credit crisis has resulted in increases in the cost of funding raised through securitization and capital markets, causing investors who are reluctant to lend in turbulent times to exit the market. This has also affected banks because they have been active participants in capital markets. Other types of funding that incur interest costs are deposits made by foreign investors, federal funds purchased, trading liabilities and subordinated notes and debentures.

WagesLabor costs are another significant expense item for commercial banks, estimated to account for 17.8% of industry revenue in 2011. The profitability of a commercial bank is directly related to the quality of service that their employees deliver to customers, which requires well-trained, knowledgeable staff that can provide excellent customer service. This is unlikely to change in the coming years. Thus, wages will continue to make up a significant portion of banks’ expenses.

Other costsA key to succeeding in the industry is having an easily accessible branch network that spans regions heavily populated with customers. With a focus on decreasing the capital intensity of the industry, banks continue to opt for leasing premises rather than owning them outright. Subsequently, rental expense is a significant cost item, accounting for an estimated 5.0% of industry revenue.

Other expenses related to this industry include professional fees and commissions, advertising, utility expenses, depreciation, data processing and telecommunication fees. As competition has intensified in this industry, IBISWorld expects these costs have also increased.

Industry�Costs�and�Average�Sector�Costs■�Profi�t■�Rent■�Utilities■�Depreciation■�Other■�Wages■�Purchases

Industry�Costs�(2011)�

Average�Costs�of�all�Industries�in�sector�(2011)�

9.1Profit

17.866.12.0

12.6Profit

0.513.570.31.5


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Barriers�to�Entry In order to operate as a commercial bank in the United States, the organization must receive prior approval by the Board of Governors of the Federal Reserve System. It is then subject to the supervision of, and regular inspections by, the Board, the Office of the Comptroller of the Currency, the FDIC and other federal and state regulatory agencies. Banks are restricted in their range of activities, in acquisitions of other banks and in interstate banking activities. Furthermore, commercial banks are subject to capital and

operational requirements based on risk and leverage.

Basis�of�Competition The activities within the Commercial Banking industry in the US are highly competitive. Generally, the markets served by this industry involve competition with banks, thrifts, credit unions, government agencies, mortgage brokers and other non-bank organizations offering financial services. Firms in this industry will also compete against banks and thrifts owned by non-regulated diversified corporations and other entities that offer financial services through alternative delivery channels, such as the internet.

Competition is based on customer service, interest rates on loans and deposits, quality and range or variety of products and services, lending limits and customer convenience (e.g. locations of branches). Despite the large decline in the number of commercial banks and the explosion in the number of ATMs, growth in the number of banking offices has continued,

highlighting the need to be conveniently located for customers. Transaction execution, innovation, technology, reputation and price are also methods on which firms compete in this industry.

Competitive conditions are likely to continue to intensify as merger activity in the financial services industry produces larger, better-capitalized and more geographically diverse companies that are capable of offering a wider array of financial products and services at more competitive prices. Competition for retail deposits is also expected to intensify, as banks seek to reduce their reliance on wholesale markets for funding. There are also new entrants joining in the competition. In 2008, both Goldman Sachs and Morgan Stanley converted from investment banks status into bank holding companies. They have stated that one reason behind this move is to enable them to increase their access to retail deposits.

Level�&�Trend��Competition in this industry is High and the trend is Increasing

Barriers�to�Entry�checklist� LevelCompetition HighConcentration LowLife Cycle Stage MatureCapital Intensity LowTechnology Change MediumRegulation & Policy HeavyIndustry Assistance High


Level�&�Trend��Barriers to Entry in this industry are Medium and Steady



Industry�Globalization

Commercial bank operations are predominantly focused in the United States; however, banking is increasingly becoming global in nature. This has largely been facilitated by deregulation of financial markets in a rising number of countries across the globe. Furthermore, individual countries’ regulation is becoming more uniform, which acts to lower entry barriers for international banking organizations wishing to gain access into a specific country’s banking market. International capital standards, outlined in the Basel II Capital Accord, implies that very little adjustment to a bank’s operational and capital standard is required in order to enter banking markets of participating countries. All of the industry’s largest players have global

operations and have offices set up across many countries.

The subprime crisis caused a number of banks to reduce their level of participation in foreign markets, concentrating instead on their domestic operations and regaining the capital strength to be able to recover from the debilitating losses suffered. According to the International Monetary Fund, cross-border assets held on banks’ balance sheets as a proportion of total assets fell in 2008, as cross-border lending declined at a faster rate than overall credit. However, this situation is more than likely to be reversed as banks recover and continue to employ their expansion activity into foreign markets.

Level�&�Trend��Globalization in this industry is Low and the trend is Increasing


Player�Performance Bank of America (BofA), headquartered in Charlotte, NC, is the world’s largest holding-backed company in terms of assets and revenue. The bank operates through three business segments: global consumer and small business banking (GC&SBB), global corporate and investment banking, and global wealth and investment management. The company provides a diversified range of banking and non-banking financial services in 50 states and to more than 55 million consumer and small-business relationships. These accounts are serviced through BofA’s 700 retail offices, more than 17,000 ATMs and a growing online channel that has more than 21 million active users.

The GC&SBB segment is most relevant to the Commercial Banking industry, and is the source of 80% of BofA’s revenue. Within this segment are four primary businesses: deposits, card services, consumer real estate, and asset liability

management. Deposits are the revenue-generating activity most pertinent to the industry. Deposit products include traditional savings accounts, money market savings accounts, CDs and IRAs, checking accounts and debit cards. Deposits provide a stable source of funding and liquidity. The company earns net interest-spread revenue from investing this liability in interest-earning assets. The bank also generates revenue through various account fees, such as insufficient-fund fees, overdraft charges and account service fees, and interchange fees from debit cards.

In the five years to 2011, BofA revenue is forecast to increase by 10.0% annually to $67.1 billion. During the same period, BofA has been the largest deposit holder in the United States with a domestic deposit market share of 12.7%. BofA has been able to maintain its position as the leading commercial bank through M&As such as FleetBoston, MBNA,

�Major�CompaniesBank�of�America�Corporation�� |�� Wells�Fargo�&�CompanyJPMorgan�Chase�&�Co.�� |�� Citigroup�Inc.�� |�� Other�Companies

64.2%Other

Bank�of�America�Corporation�11.8%

Wells�Fargo�&�Company�11.3%

J.P.�Morgan�Chase�&�Co.�7.7%

Citigroup�Inc.�5.0%


Major�players(Market share)

Bank�of�America�Corporation�–�fi�nancial�performance

YearRevenue�($ billion) (% change)

Net�Income�($ billion) (% change)

2006 41.69 47.2 1.17 -83.3

2007 47.86 14.8 9.43 706.0

2008 58.34 21.9 4.23 -55.1

2009 62.15 6.5 6.25 47.8

2010 65.68 5.7 6.42 2.7

2011* 67.12 2.2 6.99 8.9

*EstimateSOURCE: ANNUAL REPORT AND IBISWORLD

Bank�of�America�Corporation��Market share: 11.8%


Major�Companies

Player�Performance Wells Fargo is a diversified financial services company that provides banking, insurance, investment, mortgage and consumer finance. It is headquartered in San Francisco. The firm separates its businesses into three main segments: community banking, wholesale banking, and Wells Fargo Financial. Wells Fargo has 6,650 retail branches, 12,260 ATMs, 276,000 employees and more than 48 million customers.

Community banking is the largest business segment, generating more than 80.0% of Wells Fargo’s revenue. Wells Fargo’s community banking business serves small-business clients as well as retail customers and high net worth individuals. The community bank provides a wide range of products ranging from home mortgages and debit cards to personal trusts.

Like many of the other major players, Wells Fargo revenue growth was bolstered by external acquisition. In 2008, Wells Fargo acquired Wachovia and, as a result, became the nation’s largest mortgage lender and the second-largest diversified services firm in the United States in term of deposits.

Similar to virtually all major banks, Wells Fargo has been negatively impacted by the credit crunch and subsequent recession, with revenue and profit declines. However, these declines should be taken in context because they are not extraordinarily large compared to other banks. Wells Fargo has not been forced to write down large losses on its assets compared to the other four large banks.

During the five years to 2011, Wells Fargo’s commercial banking revenue is

Player�Performancecontinued

Countrywide Financial and Merrill Lynch. This M&A activity allowed BofA to realize cost synergies. It also allowed BofA to acquire new banking clients as well as the opportunity to cross market to clients. For example, many of Merrill Lynch’s brokerage clients now have BofA banking accounts.

Like most banks in the industry, BofA was hit hard by the recession. The

financial crisis that began in 2007 as well as subsequent contraction in credit markets put negative pressure on the bank’s core banking and mortgage businesses. As a result, BofA received $45.0 billion in government loans under TARP. In 2010, commercial bank revenue is expected to increase 5.7% as more people use deposit products and credit markets continue to thaw.

Wells�Fargo�&�Company�–�fi�nancial�performance


Net�Income�($ million) (% change)

2006 23.20 8.3 5.47 9.6

2007 25.60 10.3 5.24 -4.2

2008 27.23 6.4 1.73 -67.0

2009 57.19 110.0 8.19 373.4

2010 59.48 4.0 8.63 5.4

2011* 64.33 8.2 9.21 6.7


Wells�Fargo�&�Company��Market share: 11.3%


Major�Companies

Player�Performance JPMorgan Chase is one of the largest financial institutions in the world; as of January 1, 2010, the firm operated 5,154 branches. JPMorgan’s activities are organized into six business segments: investment banking, retail financial services, card services, commercial banking, treasury and security services, asset management and corporate.

The most relevant business segments for this industry are retail financial services and commercial banking. Retail financial services accounts for approximately 30.0% of the firm’s earnings. JPMorgan has the third-largest deposit base in the United States and also operates the third-largest ATM network in the country. Commercial banking is a small but strong component of JPMorgan’s business, serving more than 260,000 clients throughout the United States. This division provides a range of services to corporations, government agencies, nonprofits and other financial institutions. It comprises approximately 7.0% of firm revenue.

Similar to BofA and Wells Fargo,

JPMorgan grew through external acquisition during the recession. On September 25, 2009, JPMorgan acquired Washington Mutual for $1.9 billion from the FDIC. The acquisition of Washington Mutual gave JPMorgan its first significant presence in the West Coast, which will help boost revenue into the future.

In relation to other commercial banks, JPMorgan was able to operate smoothly through the recession. In June 2009, the firm announced that it had received permission to repay the $25.0 billion in TARP funds it had received from the government. As a result of its strong financial position, it was one of the first financial institutions able to repay TARP funds.

During the five years to 2011, JPMorgan revenue is estimated to increase 13.5% per year, totaling $44.1 billion. In 2009, revenue received a boost from the completion of the Washington Mutual integration and solid growth in retail banking, opening more than 6.0 million new checking accounts in 2009.

Player�Performancecontinued

expected to increase 22.7% per year to $64.3 billion. This growth is misleading, however; revenue grew 110% in 2009 because Wells Fargo included revenue

from newly acquired Wachovia. In 2010, Wells Fargo revenue is expected to grow 4.0% as deposits increase and credit markets thaw.

JPMorgan�Chase�&�Company�–�fi�nancial�performance


Net�Income�($ million) (% change)

2006 23.41 16.2 4.03 5.5

2007 24.65 5.3 4.32 7.2

2008 28.30 14.8 2.32 -46.3

2009 38.40 35.7 1.37 -40.9

2010 40.51 5.5 1.99 45.3

2011* 44.1 8.9 2.11 6.0


J.P.�Morgan�Chase�&�Co.��Market share: 7.7%


Major�Companies

Other�Companies US BancorpEstimated market share: 3.0%US Bancorp is the fifth-largest commercial bank in the United States. With 3,015 offices and 5,148 ATMs, US Bancorp serves 25 states. The bank operates four distinct businesses: consumer banking, wholesale banking, wealth management and security services, and payment service. The

firm provides these services to more than 15.8 million customers. US Bancorp’s consumer banking division is most relevant to this industry and includes the following services: community banking, corporate banking, small-business banking, consumer lending, home mortgage, student banking, and ATM and debit processing and services.

Player�Performance Citigroup has the world’s largest financial services network, spanning 140 countries with approximately 16,000 offices worldwide. The company employs approximately 300,000 staff members around the world and holds more than 200 million customer accounts.

Citigroup operates four business segments: consumer banking, institutional clients group, global wealth management and global cards. The consumer banking segment is most relevant to this industry and includes the retail bank of Citigroup’s global branch network, branded Citibank. Citibank is the fourth-largest retail bank in the United States based on deposits.

Out of the four biggest banks in the United States, Citigroup suffered the most during the recession. The firm faced

huge losses during the crisis and was rescued by a massive bailout by the US government in 2008. Citigroup’s downfall came because of its large exposure to CDOs. The firm ran risk models to look at mortgages in a particular area but never included the possibility of a national housing downturn. As a result, revenue decreased in both 2008 and 2009.

During the five years to 2011, industry revenue is projected to increase 1.4% annually to $28.3 billion. However, these results are indicative of strong performance at the beginning of the performance period rather than the end. Poor performance coupled with acquisitions by BofA, Wells Fargo and JPMorgan have greatly hurt Citibank’s market share, which is expected to be 5.0% in 2011.

Citigroup�Inc.�–�fi�nancial�performance


Net�Income�($ billion) (% change)

2006 26.39 10.7 6.34 -9.6

2007 28.88 9.4 1.33 -79.0

2008 28.27 -2.1 -13.25 N/C

2009 26.84 -5.1 -2.94 -77.8

2010 27.00 0.6 1.99 N/C

2011* 28.32 4.9 2.07 4.0


Citigroup�Inc.��Market share: 5.0% Industry�Brand�NamesCitibank


Major�Companies

Other�Companiescontinued

Similar to the larger commercial banks in the industry, US Bancorp has grown through M&As during the recession. In November 2008, US Bancorp purchased

Downey Savings and Loan and Pomona First Federal Bank & Trust. In October 2009, US Bancorp agreed to acquire the Nevada banking operations of BB&T.


Capital�Intensity The Commercial Banking industry is highly competitive, requiring banks to continually achieve cost savings and other efficiencies to maintain customer satisfaction and retain their business. This requires investment in an extensive branch and ATM network in order to have a presence in regions that are conveniently located to a bank’s customer base.

Beyond this, banks must invest heavily in technology and communication infrastructure, which is necessary to remain competitive in today’s dynamic environment. These, and other investments made, impose capital investment requirements on banks, which is represented by depreciation.

In an attempt to reduce capital intensity, banks have opted to rent and lease premises as opposed to

�Operating�ConditionsCapital�Intensity�� |�� Technology�&�Systems�� |�� Revenue�VolatilityRegulation�&�Policy�� |�� Industry�Assistance

Tools�of�the�Trade:�Growth�Strategies�for�Success


Labo

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veCapital�Intensive

Change�in�Share�of�the�Economy

New�Age�Economy

Recreation,�Personal�Services,�Health�and�Education. Firms benefi t from personal wealth so stable macroeconomic conditions are imperative. Brand awareness and niche labor skills are key to product differentiation.

Traditional�Service�Economy

Wholesale�and Retail. Reliant on labor rather than capital to sell goods. Functions cannot be outsourced therefore fi rms must use new technology or improve staff training to increase revenue growth.

Old�Economy

Agriculture�and�Manufacturing.�Traded goods can be produced using cheap labor abroad. To expand fi rms must merge or acquire others to exploit economies of scale, or specialize in niche, high-value products.

Investment�Economy

Information,�Communications,�Mining,�Finance�and�Real�Estate.�To increase revenue fi rms need superior debt management, a stable macroeconomic environment and a sound investment plan.

Savings�Banks�&�Thrifts

Credit�Unions Commercial�Leasing

Money�Market�&�Other�Banking

Credit�Card�Issuing


Capital intensity

0.5

0.0

0.1

0.2

0.3

0.4

SOURCE: WWW.IBISWORLD.COMDotted line shows a high level of capital intensity

Capital units per labor unit

Commercial Banking

Finance and Insurance

Economy

Level��The level of capital intensity is Low


Operating�Conditions

Technology&�Systems

Firms in this industry operate in a highly competitive environment that is experiencing even more intensified competition as M&A activity continues to be prevalent. This activity produces larger, better-capitalized companies that are capable of offering a wider array of financial products and services and at more competitive prices. The technological advances and the growth of e-commerce have made it possible for many non-depository institutions to offer products and services that traditionally were banking products, and for financial institutions to compete with technology companies in providing electronic and internet-based financial solutions.

In addition, technology has significantly changed the commercial Banking industry by lowering the cost of storing, processing and accessing data

through the growth of low-cost communications equipment. Technology will continue to contribute to significant changes in retail payments systems and financial services distribution channels, bank risk management and data assessment.

Because of the increasing need for technological empowerment and continuous improvement of equipment, new pricing structures and distribution channels have emerged. It is expected that these developments will encourage customers to adapt to these new, low-cost distribution channels in favor of more costly alternatives.

Access to the internet, restricted internal intranets and increasingly secure transmission of information is expected to accelerate the use of networks as a means to reduce costs.

Capital�Intensitycontinued

owning them outright. This has caused some institutions to sell property where branches were located and to rent new locations. As a result, the Commercial Banking industry in the United States has a moderate level of capital intensity.

Despite aiming to reduce the capital intensity of the banking industry, labor continues to be the biggest investment that banks have to make due to the heavy

reliance on human capital in the industry’s activities. The provision of banking services requires staff who are well educated and professional and who are able to deliver services in a satisfactory manner to clients. The investment in branch networks is further driving up the investment in labor: With each additional branch opened, banks must hire additional units of labor to serve the customers that they acquire and retain.

Level��The level of Technology Change is Medium



Regulation�&�Policy Federal Reserve SystemThe Federal Reserve is the federal supervisor and regulator for all US banks and bank holding companies, including financial holding companies formed under the authority of the Gramm-Leach-Bliley Act of 1999, and of state-chartered commercial banks that are members of the Federal Reserve System. By overseeing these organizations, the Federal Reserve seeks primarily to promote the organizations’ sound operation and compliance with laws and regulations.

The Federal Reserve exercises important regulatory influence over entry into the US banking system and

the structure of the system through its administration of the Bank Holding Company Act, the Bank Merger Act (with regard to state member banks), the Change in Bank Control Act (with regard to bank holding companies and state member banks), and the International Banking Act. In carrying out its responsibilities, the Federal Reserve coordinates its supervisory activities with other federal banking agencies, state agencies, functional regulators and the bank regulatory agencies of other nations.

Bank Holding Company ActUnder the Bank Holding Company Act,

Revenue�Volatility Industry revenue is affected by fluctuations in the level of interest rates, as the industry will be able to charge higher average rates to loan balances. However, these increased returns may be offset by the resulting dampened demand for credit, which reduces lending growth. The industry is also affected by general economic conditions, as good times often lead to greater consumer and business confidence, which causes greater demand for the

industry’s products and services. When times get tough, the industry can be hit hard, as observed in 2008 and 2009 through the subprime crisis. Over the five years to 2011, industry revenue growth rates fluctuated from a low of -15.6% to a high of 9.0%. Much of the volatility has been driven by strong growth before the subprime crisis, followed by a period of severe declines as the financial system collapsed and the economy contracted.

Level��The level of Volatility is Medium


Volatility�vs�GrowthRe

venu

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%)�

1000

100

10

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Five�year�annualized�revenue�growth�(%)�–30 –10 10 30 50 70

Hazardous

Stagnant

Rollercoaster

Blue�Chip

* Axis is in logarithmic scale


A higher level of revenue volatility implies greater industry risk. Volatility can negatively affect long-term strategic decisions, such as the time frame for capital investment.

When a fi rm makes poor investment decisions it may face underutilized capacity if demand suddenly falls, or capacity constraints if it rises quickly.

Level�&�Trend��The level of Regulation is Heavy and the trend is Increasing



Regulation�&�Policycontinued

a corporation or similar organization must obtain the Federal Reserve’s approval before forming a bank holding company through the acquisition of one or more banks in the United States. Once formed, a bank holding company must receive Federal Reserve approval before acquiring or establishing additional banks. Bank holding companies generally may engage only in activities that the Board of Governors of the Federal Reserve System (the Board) has previously determined to be closely related to banking. Since 1996, the Act has provided an expedited prior-notice procedure for certain permissible nonbanking activities and for acquisitions of small banks and nonbank entities.

Since 2000, the Act has permitted the creation of a special type of bank holding company called a financial holding company (see subsection Federal Reserve System). These are allowed to engage in a broader range of non-bank activities. Among other things, they may affiliate with securities firms and insurance companies and engage in certain merchant banking activities.

Bank Merger ActThe Bank Merger Act requires that all proposals involving the merger of insured depository institutions be acted on by the appropriate federal banking agency. If the surviving bank is a state member bank, the Federal Reserve has primary jurisdiction. Before acting on a merger proposal, the Federal Reserve considers financial and managerial resources of the applicant, the future prospects of the existing and combined institutions, the convenience and needs of the community to be served, and the competitive effects of the proposed merger.

Change in Bank Control ActThe Change in Bank Control Act requires persons seeking control of a US bank or

bank holding company to obtain approval from the appropriate federal banking agency before completing the transaction. The Federal Reserve is responsible for reviewing changes in the control of state member banks and bank holding companies. In its review, the Federal Reserve considers the financial position, competence, experience and integrity of the acquiring person; the effect of the proposed change on the financial condition of the bank or bank holding company being acquired; the effect of the proposed change on competition in any relevant market; the completeness of information submitted by the acquiring person; and whether the proposed change would have an adverse effect on the federal deposit insurance funds.

International Banking ActThe International Banking Act, as amended by the Foreign Bank Supervision Enhancement Act of 1991, requires foreign banks to obtain Federal Reserve approval before establishing branches, agencies, commercial-lending company subsidiaries, or representative offices in the United States. In reviewing proposals, the Federal Reserve generally considers whether the foreign bank is subject to comprehensive supervision or regulation on a consolidated basis by its home country supervisor and whether the home-country supervisor has consented to the establishment of the US office.

The Dodd-Frank BillPresident Obama has pointed the finger at large commercial banks, specifically their lending practices, as the match that lit the fuse of the global financial crisis and subsequent recession. As a result, he and other members of Congress have fought to ensure that it never happens again. In the eyes of President Obama and the majority of Congress, the Dodd-Frank Bill does just that. The bill focuses



Regulation�&�Policycontinued

on a few key areas, such as increased transparency, fee reduction of interchange fees and limits on proprietary trading. The interchange fees, charged to merchants on debit-card

transactions, would be cut, hurting banks as well as debit card issuers. Also, proprietary trading will cap the limit the investment of private equity and hedge funds to 3.0% of Tier 1 Capital.

Industry�Assistance The Commercial Banking industry does not receive any protection by way of direct or indirect tariffs. However, given the instability that the global financial crisis has brought upon the financial sector in the United States, the government has stepped in to stabilize conditions through the introduction of TARP. TARP allows the US Department of the Treasury to purchase assets and equity from those financial institutions deemed too important to fail in order to strengthen the financial sector; it allows the purchase or insure up to $700 billion of “troubled assets.” The Treasury was given $250 billion immediately, following the creation of the fund as the Emergency Economic Stabilization Act 2008 that was passed in October 2008. An additional $100 billion was distributed some time later, followed by a final $350 billion at the discretion of Congress.

Under TARP, the Treasury is allowed to purchase illiquid, difficult-to-value assets from banks and other financial institutions. The assets the Treasury is looking to purchase are collateralized debt obligations sold in the booming market prior to the subprime crisis that resulted in widespread foreclosures on the underlying loans, with the aim being

for TARP to improve the liquidity of these assets so as to allow participating companies to stabilize their balance sheets and strengthen their capital and avoid further losses. Ultimately TARP was established to stabilize the financial sector and free up capital markets by encouraging banks to resume their lending activity to levels seen before the financial crisis, both to each other and to consumers and businesses.

BofA received $45 billion in TARP support, Wells Fargo received $25 billion, JPMorgan received $25 billion and Citibank received $45 billion.

Furthermore, the institutions opting to receive government assistance under TARP are required to issue equity warrants or equity debt securities to the Treasury as consideration for the arrangement. This is beneficial for both taxpayers and the institutions. The reason is that the Treasury’s ownership stakes allow it to profit from the company regaining financial strength, thus allowing it to make a profit on the sale of shares owned in the company. For obvious reasons, the financial institutions benefit from the financial support provided as it gives them the capital strength to improve their balance sheets and return to profitability.

Level�&�Trend��The level of Industry Assistance is High and the trend is Decreasing


�Key�StatisticsRevenue�

($b)

Industry�Value�Added�

($b)Establish-

ments Enterprises Employment� Exports ImportsWages�

($billion)Domestic�Demand

Corporate�Profit($b)

2002 594.8 141.4 80,417 7,201 1,630,036 -- -- 85.0 N/A 872.22003 574.3 143.3 80,702 7,074 1,596,203 -- -- 88.8 N/A 977.82004 544.3 145.2 83,030 6,978 1,591,328 -- -- 93.5 N/A 1,245.92005 586.4 149.3 81,781 6,933 1,590,976 -- -- 93.6 N/A 1,456.12006 640.4 160.1 87,714 6,885 1,633,992 -- -- 99.3 N/A 1,608.32007 643.0 160.3 87,758 6,888 1,634,809 -- -- 99.1 N/A 1,541.72008 542.5 149.9 86,705 6,806 1,615,191 -- -- 98.3 N/A 1,360.42009 491.4 134.3 78,175 6,515 1,563,505 -- -- 99.0 N/A 1,308.92010 523.9 158.5 77,237 6,410 1,544,743 -- -- 100.4 N/A 1,360.82011 570.9 164.7 74,074 6,455 1,555,556 -- -- 101.8 N/A 1,413.02012 607.7 173.5 74,667 6,506 1,568,001 -- -- 104.9 N/A 1,524.92013 649.1 182.5 75,413 6,571 1,583,681 -- -- 107.7 N/A 1,595.22014 678.9 191.8 76,318 6,678 1,602,685 -- -- 110.5 N/A 1,643.92015 711.4 201.8 73,724 6,758 1,621,917 -- -- 113.4 N/A 1,693.32016 747.0 212.6 70,931 6,769 1,631,412 -- -- 116.5 N/A 1,761.2Sector�Rank 4/31 2/31 6/31 14/31 1/31 N/A N/A 1/31 N/A N/AEconomy�Rank 12/703 13/703 83/702 278/702 13/703 N/A N/A 9/703 N/A N/A

IVA/Revenue�(%)

Imports/Demand�

(%)Exports/Revenue�

(%)

Revenue�per�Employee�

($’000)Wages/Revenue�

(%)Employees�

per�Est.Average�Wage�

($)

Share�of�the�Economy�

(%)2002 23.77 N/A N/A 364.90 14.29 20.27 52,146.09 1.222003 24.95 N/A N/A 359.79 15.46 19.78 55,632.02 1.212004 26.68 N/A N/A 342.04 17.18 19.17 58,755.96 1.182005 25.46 N/A N/A 368.58 15.96 19.45 58,831.81 1.182006 25.00 N/A N/A 391.92 15.51 18.63 60,771.41 1.232007 24.93 N/A N/A 393.32 15.41 18.63 60,618.70 1.212008 27.63 N/A N/A 335.87 18.12 18.63 60,859.68 1.132009 27.33 N/A N/A 314.29 20.15 20.00 63,319.27 1.042010 30.25 N/A N/A 339.15 19.16 20.00 64,994.63 1.202011 28.85 N/A N/A 367.01 17.83 21.00 65,442.84 1.212012 28.55 N/A N/A 387.56 17.26 21.00 66,900.47 1.242013 28.12 N/A N/A 409.87 16.59 21.00 68,006.12 1.272014 28.25 N/A N/A 423.60 16.28 21.00 68,946.80 1.292015 28.37 N/A N/A 438.62 15.94 22.00 69,917.26 1.322016 28.46 N/A N/A 457.89 15.60 23.00 71,410.53 1.35Sector�Rank 17/31 N/A N/A 20/31 14/31 8/31 19/31 2/31Economy�Rank 437/703 N/A N/A 242/703 348/703 276/702 129/703 13/703

Figures are inflation-adjusted 2011 dollars. Rank refers to 2011 data.

Revenue�(%)

Industry�Value�Added�

(%)

Establish-ments�

(%)Enterprises�

(%)Employment�

(%)Exports�

(%)Imports�

(%)Wages�

(%)

Domestic�Demand�

(%)

Corporate�Profit(%)

2003 -3.4 1.3 0.4 -1.8 -2.1 N/A N/A 4.5 N/A 12.12004 -5.2 1.3 2.9 -1.4 -0.3 N/A N/A 5.3 N/A 27.42005 7.7 2.8 -1.5 -0.6 0.0 N/A N/A 0.1 N/A 16.92006 9.2 7.2 7.3 -0.7 2.7 N/A N/A 6.1 N/A 10.52007 0.4 0.1 0.1 0.0 0.1 N/A N/A -0.2 N/A -4.12008 -15.6 -6.5 -1.2 -1.2 -1.2 N/A N/A -0.8 N/A -11.82009 -9.4 -10.4 -9.8 -4.3 -3.2 N/A N/A 0.7 N/A -3.82010 6.6 18.0 -1.2 -1.6 -1.2 N/A N/A 1.4 N/A 4.02011 9.0 3.9 -4.1 0.7 0.7 N/A N/A 1.4 N/A 3.82012 6.4 5.3 0.8 0.8 0.8 N/A N/A 3.0 N/A 7.92013 6.8 5.2 1.0 1.0 1.0 N/A N/A 2.7 N/A 4.62014 4.6 5.1 1.2 1.6 1.2 N/A N/A 2.6 N/A 3.12015 4.8 5.2 -3.4 1.2 1.2 N/A N/A 2.6 N/A 3.02016 5.0 5.4 -3.8 0.2 0.6 N/A N/A 2.7 N/A 4.0Sector�Rank 11/31 19/31 27/31 10/31 17/31 N/A N/A 28/31 N/A N/AEconomy�Rank 59/703 272/703 681/702 270/702 376/703 N/A N/A 405/703 N/A N/A

Annual�Change

Key�Ratios

Industry�Data



Jargon�&�Glossary

BARRIERS�TO�ENTRY Barriers to entry can be High, Medium or Low. High means new companies struggle to enter an industry, while Low means it is easy for a firm to enter an industry.

CAPITAL/LABOR�INTENSITY An indicator of how much capital is used in production as opposed to labor. Level is stated as High, Medium or Low. High is a ratio of less than $3 of wage costs for every $1 of depreciation; Medium is $3 – $8 of wage costs to $1 of depreciation; Low is greater than $8 of wage costs for every $1 of depreciation.

CONSTANT�PRICES The dollar figures in the Key Statistics table, including forecasts, are adjusted for inflation using 2011 as the base year. This removes the impact of changes in the purchasing power of the dollar, leaving only the ‘real’ growth or decline in industry metrics. The inflation adjustments in IBISWorld’s reports are made using the US Bureau of Economic Analysis’ implicit GDP price deflator.

DOMESTIC�DEMAND The use of goods and services within the US; the sum of imports and domestic production minus exports.

EARNINGS�BEFORE�INTEREST�AND�TAX�(EBIT)� IBISWorld uses EBIT as an indicator of a company’s profitability. It is calculated as revenue minus expenses, excluding tax and interest.

EMPLOYMENT The number of working proprietors, partners, permanent, part-time, temporary and casual employees, and managerial and executive employees.

ENTERPRISE A division that is separately managed and keeps management accounts. The most relevant measure of the number of firms in an industry.

ESTABLISHMENT The smallest type of accounting unit within an Enterprise; usually consists of one or more locations in a state or territory of the country in which it operates.

EXPORTS The total sales and transfers of goods produced by an industry that are exported.

IMPORTS The value of goods and services imported with the amount payable to non-residents.

INDUSTRY�CONCENTRATION IBISWorld bases concentration on the top four firms. Concentration is identified as High, Medium or Low. High means the top four players account for over 70% of revenue; Medium is 40 –70% of revenue; Low is less than 40%.

INDUSTRY�REVENUE The total sales revenue of the industry, including sales (exclusive of excise and sales tax) of goods and services; plus transfers to other firms of the same business; plus subsidies on production; plus all other operating income from outside the firm (such as commission income, repair and service income, and rent, leasing and hiring income); plus capital work done by rental or lease. Receipts from interest royalties, dividends and the sale of fixed tangible assets are excluded.

INDUSTRY�VALUE�ADDED The market value of goods and services produced by an industry minus the cost of goods and services used in the production process, which leaves the gross product of the industry (also called its Value Added).

INTERNATIONAL�TRADE The level is determined by: Exports/Revenue: Low is 0 –5%; Medium is 5 –20%; High is over 20%. Imports/Domestic Demand: Low is 0 –5%; Medium is 5 –35%; and High is over 35%.

LIFE�CYCLE All industries go through periods of Growth, Maturity and Decline. An average life cycle lasts 70 years. Maturity is the longest stage at 40 years with Growth and Decline at 15 years each.

NON-EMPLOYING�ESTABLISHMENT Businesses with no paid employment and payroll are known as non-employing establishments. These are mostly set-up by self employed individuals.

VOLATILITY The level of volatility is determined by the percentage change in revenue over the past five years. Volatility levels: Very High is greater than ±20%; High Volatility is between ±10% and ±20%; Moderate Volatility is between ±3% and ±10%; and Low Volatility is less than ±3%.

WAGES The gross total wages and salaries of all employees of the establishment.

Industry�Jargon

IBISWorld�Glossary

LOAN�AND�LEASE�LOSS�PROVISION Amount set aside as an allowance for bad debts, i.e. debts where the customer defaults or where the terms of the loan need to be renegotiated.

WARRANT Type of security that entitles the holder to purchase shares in the issuing company at a specified price.

WRITE-DOWN Deliberate reduction in the book value of an asset.

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