The recent strong profitability of banks may attract predators ready to pluck hard-won customers, according to one Wall Street analyst.

"Profitability invites competition," said Susan L. Roth of Donaldson, Lufkin & Jenrette Securities Corp. "And financial reform and the Internet have opened the door that much wider."

The immediate reaction to the recent reform legislation has been to view banks as likely acquirers of insurance companies and other providers of financial services, since banks have greater market capitalization than many of these companies.

But Ms. Roth worries about dilution of banks' competitive advantage and the erosion of profitability as new competitors, including some of the nation's most savvy marketers, increasingly poach on the industry's turf.

In a study provocatively titled "Are Banks Too Profitable?'' the DLJ analyst said this month that she was surprised to find that for the past several years major banks have on average generated a "far more generous" pretax profit margin than have brokerage, life insurance, credit card, and consumer finance companies.

But higher-than-normal returns "rarely last," Ms. Roth cautioned, because they draw increased competition. That means future profitability is likely to be "rationalized."

A dramatic example of the phenomenon is the credit card industry, where the return on assets has fallen from a lofty 2.3% in 1990 to under 1.5% last year, and considerably less for major banks.

"Most banks were milking their credit card businesses at the expense of consumers," Ms. Roth said. Predictably, the excess returns attracted new competition, some of it from business giants like AT&T.

"Seizing the opportunity created by the banks, new entrants began to turn up the heat," she said. "Satisfied to earn a more modest but still quite healthy return, these new competitors priced and marketed more aggressively."

Some of those marketing efforts raised consumers' awareness, making them "more demanding shoppers for credit products," Ms. Roth noted. The result is that returns have been sharply reduced, and that market share shifted and consolidated away from banks.

"Recall that a number of the credit card industry's dominant players - Citigroup Inc. and Chase Manhattan Corp, to name two - posted negative earnings comparisons in their credit card operations as returns were rationalized," Ms. Roth said.

Banks have recently been buying back some of that lost market share. Citigroup purchased the AT&T Universal Card portfolio and Bank One acquired First USA. But the acquisitions have cost "a pretty penny," the analyst noted.

For Bank One, the cost has been very high. Problems in the wake of its First USA deal have depressed its earnings and stock price, damaged its reputation on Wall Street, and could eventually lead to the sale of the bank itself.

To be sure, not everyone thinks banks will face a horde of new players in the wake of reform. "We do not think the recent legislation will significantly alter the competitive landscape," said Lawrence W. Cohn of Ryan, Beck & Co. in Livingston, N.J.

Moreover, Mr. Cohn cautioned that though bank returns have recently been excellent, they are not higher than other those of other companies when viewed over an entire business cycle. "The cycle has not turned in a long time, but banking remains a cyclical industry," he cautioned.

"There will be another recession at some point," Mr. Cohn said. And when that happens, this industry will give back a lot of its gains. It always does, and there is no reason to believe it will be any different next time."

Ms. Roth also worries that the industry's high returns are vulnerable, but for a different reason.

Though banks' current profitability is higher than that of other financial services companies, their rates of per-share revenue and earnings growth are slower than those generated by brokerage, consumer finance, credit card, and life insurance companies, she said.

The DLJ analyst said this is surely not because business trends are inherently more favorable for other financial businesses, but because banks, on average, are considerably less skilled at sales and marketing of their products and services.

Ms. Roth thinks other financial services companies, whose results lag behind those of banks, could well begin seizing on bank products as a way of improving their own returns as the entire financial services arena becomes more competitive.

"Why wouldn't the likes of Charles Schwab and Merrill Lynch more aggressively work to offset the cost of declining retail trading commissions with an increase in the fees generated by selling more products to their existing customers?" Ms. Roth asked.

She noted that banks have historically operated with two distinct competitive advantages over other financial services providers. First, access to low-cost funds via their government-insured deposit activities; second, what Ms. Roth called their "unique positioning as a 'trusted agent' " of the consumer.

Now, however, barriers to entry have been lowered, and the DLJ analyst said checking accounts and credit products are "a logical source of relationship and revenue enhancement" for firms like Charles Schwab and Merrill Lynch.

Moreover, these firms are far more sales-oriented and marketing-savvy than even many of the largest banks, and have customer bases and national distribution networks.

"This spells trouble for those banks not yet equipped to do battle," Ms. Roth said.

Instead of measuring themselves almost exclusively with traditional measures like returns on assets and equity, the analyst said, banks need to "price more competitively, promote more aggressively, and at the same time provide superior customer service." Doing so will give them the opportunity to retain, and ideally gain, profitable market share that will sustain and promote strong revenue and earnings growth, she said.

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