Predictions that the banking industry faces widespread consolidation were reinforced Tuesday in a major study released by Arthur Andersen & Co. and the Bank Administration Institute.

The study predicts that the number of U.S. banks will decline by 24% this decade, with virtually all of the casualties being community banks.

A Sharp Cut in Branches

It also foresees a broad-based rethinking of the industry's cost structure and strategies. Among the likely results: A 20% reduction in both the number of branches and employees by the year 2000, and a growing degree of specialization as institutions abandon the traditional goal of being all things to all people.

The driving forces behind the changes, the study says, will be overcapacity and a need to real-locate capital.

"Redundant facilities and operating structures" are widely perceived as a key problem, said Waino Pihl, who heads the banking practice at Arthur Andersen's consulting affiliate. "The feeling is that if the inefficiencies are removed so too will be the capital shortage" - because improved earnings will bolster capital ratios.

"While most people agree the industry lacks sufficient capital, upon further probing we learn the real need is to improve the distribution of capital in the business, through consolidation," Mr. Pihl told those at a press conference Tuesday in New York.

The study's findings, which represent a consensus forecast of where the industry will be 10 years from now, are largely in line with predictions for the industry by other consultants.

The study was based on a survey this summer of 250 people -- 60% from commercial banks, the rest from nonbanks as well as state and federal offices. The final report, called "Vision 2000: The Transformation of Banking," will be available shortly for $125 from Andersen Consulting in Chicago.

Arthur Andersen and the BAI, a research0 organization based in Rolling Meadows, Ill., published a similar study in 1983 that overestimated the amount of consolidation that would take place in the 1980s.

Consolidation in the 1990s is expected to occur both through acquisitions and through banks' choices of areas of strategic focus, the study said.

"For the most part, the [full-service] bank as we know it today will no longer exist," said the report.

"Some will focus on a narrower product line; others will build nationwide economics of scale," the report added. "Many institutions will disappear while survivors abandom unprofitable business lines and redeploy capital."

Mr. Pihl suggested that to be successful against new types of competition from outside the industry, "bankers will have to behave like retailers and differentiate themselves by price or quality," rather than concentrate on achieving "parity with the bank next door."

"Almost all consumers know the difference between WalMart and Macy's," the report said. "But few retail banking customers today can find any difference between Citibank and Chemical Bank."

Therefore, the report emphasizes differentiation, focus, and the need to wring out overcapacity as the keys to future success.

Dwindling Community Team

The study foresees 7,312 holding companies and independent banks surviving by the year 2000, down from 9.568 in 1990.

(The study counted banking organizations, rather than individual charters. There are currently some 12,000 bank charters, including those of multibank holding companies.)

Largely because of acquisitions, the number of banks with more than $1 billion in assets is seen increasing by 16%, to 310. Seven to 10 of them would be megabanks above $100 billion; at least two would exceed $250 billion.

Those commonly classified as community banks, with less than $1 billion in assets, would decrease 25% to 7,000.

Future for Community Banks

Even larger consolidations would occur among thrifts, by 66% to 1,000; and credits unions, by 31% to 10,000.

The report said community banks have a future because of the infinite variety of "exploitable and defensible local market niches." But the local players' "success will not be guaranteed" vice conglomerates, regional powerhouses, and an emerging class of multibillion-dollar "supercommunity banks" capable of blending scale efficiencies with high-quality local services.

Two-thirds of the survey's respondents -- and 71% of the bankers -- said thrifts will lose their status as a distinct industry by the year 2000. The consensus was that thrifts' share of total financial assets will be cut in half to 7% in 2000, from 14% in 1989.

Banks' share of total assets would fall by two percentage points to 29%, the forecast said. Pension funds would gain three points to 21%; insurance companies would hold steady at 17%; money-market funds would go up five points to 14%, and other entities would gain a percentage point to 12%.

Among the other findings:

* Despite a survey consensus that the number of bank branches will hold steady at about 60,000. Andersen and BAI analysts predict a 20% to 25% contraction, based on branch-closing plans announced when banks in the same market merge.

* Insurance, more than securities brokerage, trust, or mortgage services, is expected to be the most popular new-product area for banks: 27% of large banks, 53% of midsize banks ($500 million to $5 billion in assets) and 45% of smaller banks (under $500 million) plan to enter insurance. By contrast, 23% of large banks and 9% of the medium-sized banks plan to exit credit cards, an increasing concentrated business.

* Asked their priorities for cutting noninterest expenses, branches and retail delivery systems top the list for large and midsize banks. Midsize and small banks also closely focus on data processing, which helps explain the trend toward outsourcing.

But Michael Wanbay, an Arthur Andersen partner, pointed out that such areas as corporate banking and mortgage services were viewed as "unimportant" for cost cutting -- ironic in that bankers believe these areas are in need of profiability improvement.

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