Banker Predicts Challenges Ahead

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The vice chairman with one of the largest banks in the country has a generally positive outlook for financial services, although he qualified some areas where he sees potential problems.

But what credit unions are most likely to remember about his forecast had to do with his own suggestions for the banks' not-for-profit competitors, including that members will eventually come to the realization they would be better off jettisoning the tax-exemption in favor of converting to a bank and cashing in (see related story, page 4).

Richard Hartnack, vice chairman and head of the Consumer Banking Group with the $207-billion U.S. Bancorp, Minneapolis, keynoted the Bank Administration Institute's Retail Delivery Show here with predictions across the financial services landscapes. Among them:


Hartnack pointed to news headlines related to housing industry, including a tripling of housing prices in a decade, worries over people buying houses with little money down, and the move into ever-longer mortgage terms. But those headlines aren't from the early 21st century. Rather, he said, they were from the late 1940s and early 1950s at the end of World War II. Hartnack's point was that the industry has survived such appreciation and change before.

What it may not survive, however, is the business practices of a few lenders, according to Hartnack.

"There is a dark side to what's going on," he said. "We do have members of our industry that have developed products that, frankly, either abuse people or give them the ability to abuse themselves. Negative amortization products are dangerous in the hands of all but a few people. This problem is going to come back to haunt all of us if we're not careful. When people get in trouble they are going to bring their houses to market, increasing the supply and bringing down the prices and putting all our portfolios at risk."

Hartnack called on financial institutions to realize they are going to bear the brunt of "irresponsible" lenders. "Let us do what we can to stop the idiocy of selling people products they can't understand or support," he said.

Commercial Loan Demand

Hartnack said the banking industry is experiencing the weakest demand in commercial loans ever seen in a recovering economy, at a time when many credit unions are also entering into the market. The reasons for the slow growth are simple, Hartnack said, and include manufacturers moving operations off-shore and becoming much more adept at managing their needs for credit. Combined with a host of competitors, the commercial bank share of the market has shrunk from 75% to less than 50% today.

"We've loaded up on residential mortgages, home equities and commercial real estate," he said of banks. "Collectively, we've had tremendous growth in those three areas. But it's a concentrated risk in the real estate market. We now see many making moves to diversify. We've grown leasing companies, and all of us our chasing the small business market and making that one of the most competitive market today."

Hartnack said that some banks are overexposed to real estate, and any market decline is going to mean "tremendous difficulty" for them.

Growing The Bank Franchise

Every bank has the same objective, said Hartnack, and that is to give "investors high total returns on their investments with us."

"Let's stand back and ask ourselves who is winning this battle for growth in revenues and profits? The truth is there are an awful lot of us who are winning this battle in different ways," he said. "But the group that's doing the best job of rapidly growing profits is the regional and subregional players that have developed very effective strategies. Why have they been uniquely successful? I think what they are doing is taking elements of the financial service value proposition and pushing the envelope on those propositions and doing a fantastic job of retaining clients and bringing in new ones. We talk six days a week banking; they talk about seven. We talk about short lines; they talk about no lines. But there's nothing these high growth engines in our industry are doing that can be copied and made to work for us. In fact, with the very high premiums investment markets pay for revenue and profit growth, what you see is all the competitors in the market looking to copy that."

Hartnack predicted that growth among financial institutions will get narrower and those that aren't doing well today will actually get better, putting more pressure on those performing well.


As is the case in credit unions, Hartnack said industry consolidation among banks is a "fact of life."

"We're now at a point where somewhere between 50% and 60% of all Americans are doing business with the top 25 banks," he said. "But there are still nearly 8,000 successful competitors out there. So while it's consolidated a great deal, we're a long way from done. Looking ahead, there will be the occasional merger among the very large players. But over the next 10 years, what I predict you are going to see a lot fewer mergers between the largest banks and small community banks. There will be exceptions, but by and large you're not going to see the largest banks doing many community bank purchase deals. The reason is the business models have really drifted apart. The value to the investor in the small bank today is probably greater than the value to the big bank investors."

The Next Decade

All financial institutions share a problem, according to Hartnack.

"The common problem that everyone has is that we provide a safe, reliable, trustworthy store for their liquid wealth, and a very integrated payments mechanism to make payments against that liquid wealth," he said. "Yes, we do a lot more, but at the end of the day the reason the franchise exists is because of this basic storage relationship. In the banking industry our franchise is storage of wealth and payments mechanism. What we must appreciate is that this relationship is changing rapidly on the payments side. As those payments habits change and the methodologies change, the risk is that the storage and the payments link get disconnected. The winners will be those that make sure not to lose this payments and storage connection."

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