As American bankers wrestle with a less hospitable operating environment, much has been implied about how our system compares with those of other countries. It is often said that we must become more competitive internationally.

Definitive studies have been lacking. But an analysis using two measures of profitability, two of revenue, and one of overhead indicate that consolidation will not ensure the health of the U.S. banking industry.

In this study, international comparisons were made first by region:

* America (Canada, United States, Mexico).

* Asia/Pacific (Australia, Japan, Indonesia, Korea, Philippines, Taiwan).

* Europe (Belgium, France, West Germany, Italy, Netherlands, Norway, Spain, Sweden, Switzerland, United Kingdom).

While these choices may appear arbitrary, they tend to represent the bulk of the banking business in each region.

Data from Sheshunoff Information Services' global banking data base were used. The latest year for which comparative data was available was 1990.

North American Strength

After weighted averages were obtained for each country, simple averages were obtained for each region. Thus large countries and small carried the same weight in the regional calculations.

Profitability results showed North America between the other regions in both return on equity and return on assets.

This was the first indication that the European banking model might not be a panacea for the United States.

In net interest margin, the American banks are on top: 4.15%, compared with 2.54% for Asia/Pacific and 2.32% in Europe. In noninterest income as a percentage of revenue, Asia/Pacific did best at 22.9%, followed by Europe at 18.22% and America at 11.10%.

Europe's Weak Point

These are crucial findings. The European model of a more concentrated banking structure delivers a net interest margin a little over half as large as the North American.

On the basis of the Asia/Pacific example, we might infer that a good flow of noninterest revenue can more than compensate for a weak net interest margin.

In overhead as a percentage of average assets, North America is highest, at 3.32%, followed by Europe's 2.92% and Asia/Pacific's 2.34%. The fact that the overhead disparities are less than differences in net interest margin says some ominous things about consolidation as a regulatory strategy.

The Main Competitors

As regional comparisons are only marginally useful, the countries against whose banks U.S. banks most often compete were separated out.

Those chosen for comparison were Japan, France, Germany, and the United Kingdom.

Their numbers are a lot lower than the regional ones. That means profitability is especially high where markets are less free, such as Mexico (19% ROE), Philippines (22%), Taiwan (28%), and Sweden (18%).

Beyond that, the U.S. return on equity of 7.18% is second only to France's 9.82%, and the United States leads the pack in ROA at 0.42%. At least by this comparison, the U.S. industry doesn't appear to be suffering all that much under its current regulatory regime.

Steady Erosion Probable

In the revenue area, the U.S. net interest margin at 4.0%, is easily better than its closest rival, the United Kingdom, at 1.67%. Japan is under 1%.

This would surely be good news, except that we seem to be inexorably headed toward a Japanese or European market structure, with a much smaller number of large banks. On the basis of this evidence, we should expect a steady erosion in net interest margin for U.S. banks over the next several years.

One antidote to a low net interest margin is a high noninterest revenue component, which is largely responsible for the high French return on equity. In this area, U.S. banks trail all except the Japanese banks. The good news that there appears to be lots of room for improvement.

The bad news: Some of that improvement needs to come from areas currently off-limits to banks (or off their balance sheets). There is no certainty, and perhaps no probability, that Congress will do anything enlightened about this soon.

While the U.S. net interest margin is about four times as large as the other countries', our overhead ratio of 3.58% is only about twice as large (aside from France's 2.92%). This indicates that there is limited, though still significant, benefit to be gained from streamlining operations.

France's return on equity is higher than ours, though the return on assets is lower. The French earnings don't come from the balance sheet, since the net interest margin is about a quarter of ours. And they certainly don't come from running lean shops, because the overhead is nearly as high as ours.

The answer: Noninterest income, which represents nearly twice as much of the total revenue stream as in the United States, by 27.15% to 16.08%.

Consolidation, by itself, doesn't appear to ensure prosperity. As a banking industry consolidates, net interest margin falls about twice as fast as overhead. In the United States, consolidation appears to be inevitable, but that may only mean that the banking customer will fare better, not the banks.

Single-Digit Returns

No matter where they reside, banks that depend on their balance sheets for income will be facing single-digit returns on equity. Money is a commodity, and banks that concentrates on balance-sheet sources of income will be in a commodity business.

Commodity business don't pay well. Thus, managements must redouble efforts to find and enter business that generate noninterest income.

There is overhead and then there is overhead. It is not true that any overhead dollar spent is a total loss, or that any dollar cut out of overhead is a dollar saved.

Good people aren't cheap, and neither is training and equipping them, but that may be the only way to break out of the balance-sheet syndrome and get to double-digit return on equity. Scrimping on some things makes terrific sense, but scrimping on others is false economy.

The evidence is building that neither simple consolidation nor business as usual is a road to success. Perhaps bankers need to remind themselves that the most important aspect of any business isn't the product, it's the customers.

Mr. George M. Bollenbacher, based in Berkeley Heights, N.J., is director of financial-sector consulting at Unisys Corp. His "The New Business of Banking" was recently published by Bankers Publishing/Probus.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.