As major participants in a consolidation wave, the biggest banking companies are likely to find opportunities to reverse the recent steep declines in noninterest income.
JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co., PNC Financial Services Group Inc., and others are set to increase their market share by gobbling up weaker competitors, many of whom had competed heavily on price. Some observers say the acquirers could be able to increase fees on bounced checks, raise penalty charges on late card payments, and hike fees for processing mortgages.
Hobbled by hefty credit and securities losses and capital concerns, these companies have plenty of incentive to push fees higher, even though doing so could draw the ire of customers.
"The dominant players will have more pricing power, and all the banks we talk to are well aware of that," Brad Milsaps, an analyst at Sandler O'Neill & Partners LP, said in an interview this week. "And I think they'll need to capitalize on that power, because the cost of banking — whether it's FDIC premiums going up or ever higher credit costs — the banks will have to pass along those higher costs. They either pass them along, or they settle for less profit, and I don't think they'll settle."
Some observers say that bankers compete at a local level for retail customers, and that small banks have long looked at periods of intense consolidation as a way to gain market share. They are likely to do so again, filling the vacuum left after acquisitions involving companies like National City Corp., Washington Mutual Inc., and Wachovia Corp.
"In many geographies, smaller banks already are gaining share on larger ones, so that would seem to counter the notion that the big banks will be able to deploy a significant degree of pricing power," James McCormick, the president of First Manhattan Consulting Group of New York, said in an interview this week. "In a lot of markets, community banks still have a powerful position. … Overall, on the consumer side, banks smaller than the top 30 institutions still have about 50% of market share."
What's more, several analysts said that most big banking companies raised foreign automated teller machine fees last year and are not likely to push their luck with another round of hikes on that front. Historically, even the most loyal customers have proven willing to change banks if fees rise too quickly, so most companies have long resisted increasing things like the standard $39 late fee on credit cards.
There is some precedent for hiking fees after a rash of deals. After recovering from the economic doldrums of the early 1990s, bankers broadly raised fees during a consolidation spree that peaked in 1998. But by the start of this decade many were holding fees in check, out of fear of testing depositors' pain threshold.
Bert Ely, the president of Ely & Co., said in an interview this week that banks may raise certain fees to offset credit losses, but he does not expect such hikes to develop into a sustained trend.
"It is true, without question, that the more concentration" in banking, "the more power there is in a few hands," Mr. Ely said. However, "I still think customers won't get overly dependent on one bank."
Mr. McCormick said his recent analysis of market trends shows that if bankers start "getting more aggressive on fees, you could end up shooting yourself in the foot by losing deposits."
He also said lawmakers are increasingly sensitive about any hidden or lofty fees that could be viewed as unfair.
When asked about lawmakers' concerns, James Dimon, JPMorgan Chase's chief executive, said on a call this month with analysts: "A lot of that stuff, I think, competitively it will cause changes in profits in the short run, but not in the long run. It will change your prices. If you cannot price for risk, you are going to charge everybody else more. That's what's going to happen."
Of the five largest U.S. banking companies, only B of A posted a third-quarter increase in noninterest income. Its fee income climbed 7% from a year earlier, largely as a result of the boost in mortgage banking and insurance income from the July acquisition of Countrywide Financial Corp.
Such income fell at double-digit rates at PNC, Wells, JPMorgan Chase, and Citigroup Inc. — with securities related losses as the leading culprit.
Even U.S. Bancorp, which gets more than half its revenue from fees, reported a 25% decline in third-quarter noninterest income from the second quarter, citing securities losses.
Of course, it would be illegal for a group of bankers to work officially in concert to control prices. And the biggest banking companies themselves are holding their cards close to their vests. This week none of the companies named in this story would discuss whether they are planning fee hikes.
Still, Sung Won Sohn, a former bank chief executive and now an economist at California State University, said in an interview this week that recent history shows putting a majority of the nation's bank accounts under the control of a handful of companies will give them the clout to raise fees essentially as a group.
Since the government is encouraging banking mergers and acquisitions, antitrust officials may find it harder in the future to investigate concerns about anticompetitive activity, he said.
"This consolidation will, of course, in the long run lead to higher fees for the customer," Mr. Sohn said. "The heyday of banks offering good deals will end."
Moreover, size brings the critical advantage of having locations peppered across the country, near customers' homes and offices. Some analysts say customers' collective desire for convenience will let the biggest banking companies use their ability to provide easy access to branches to keep many customers, despite higher fees — as long as major rivals do not offer big bargains.
Citi, JPMorgan Chase, and B of A now control more than half the market for unpaid credit card balances.
B of A says that once it closes its deal for Merrill Lynch & Co. Inc. this year, it expects to bank two out of three Americans. The Charlotte company, along with JPMorgan Chase, Citi, and Wells (when it closes its deal for Wachovia) would originate two-thirds of the mortgages made in the United States.
Mr. Sohn said with fewer players in the mortgage business, for example, it would be easier for, say, Wells to monitor the fee trends of its competition, enabling it to charge higher rates without fear of quiet undercutting by a competitor.
It would work much as it did when United Airlines raised fees on luggage handling this year and Northwest Airlines and other large competitors did as well, he said.
"It's an inevitable result of the consolidation we're seeing right now. The customers won't like it, and it won't be easy for the banks, but it will happen."