The hunt for higher earnings is driving banks into businesses that create new risks, according to senior U.S. and foreign bankers at the annual International Monetary Conference.

Bankers and regulators assembled here named asset management, emerging markets, investment banking, and mass retail and middle-market banking as the lines of business likely to generate the highest profits in the years ahead.

But they also noted that banks expanding in these areas face higher technology and staff costs and a variety of unfamiliar risks.

"Not all explorations for new revenue sources are directed at low-risk lines of business," observed Stephen G. Thieke, managing director at J.P. Morgan & Co. "Indeed, one of the most promising areas for growth- opportunities in emerging markets-has to be viewed as a relatively high- risk proposition."

The Morgan executive said below-investment-grade credit quality, volatile markets, and "opaque and less controllable" operational and settlement risk are among the dangers lurking for bankers.

He noted, for example, that asset management is a relatively low-risk business for banks but high acquisition costs and execution risk pose a dilemma.

"Combine this with the impact that competition will have on future operating margins and the prospects for recovery of acquisition costs, and the result can be quite high levels of risk in a 'low risk' business."

Speaking on the same topic, Hugh McColl, chairman and chief executive of NationsBank Corp., noted that bigger size has become a critical component for generating higher earnings. But he also pointed out that growth itself is not necessarily a key to success.

"Size is critical to competing domestically-if it is translated into scale, greater revenues combined with greater efficiency, more value to the customer, and most important, earnings power," Mr. McColl said.

"Success, both domestically and globally will be driven by a new equation made up of three other factors-capital, customers, and credibility."

U.S. bankers and analysts attending the conference warned that though a convergence of extremely favorable economic trends has helped banks improve credit quality, there is no guarantee that this will last.

"There's been a terrific improvement in credit, and U.S. banks have experienced terrific returns," observed Katherine R. Hensel, the director of North American equity research at Chancellor Capital Management Inc. in New York. "But we're at a sweet spot in the credit cycle and we will see some deterioration in credit quality."

Given the slow-growth economic environment, she added, return on equity at U.S. banks will probably not get much higher.

Despite this concern, senior bankers said they have enough tools at their disposal to deal with the new risks. They also observed that as banks increasingly convert themselves into intermediaries, they are retaining less risk on their balance sheet.

"The amount of retained risk is increasingly a matter of choice," Mr. Thieke said.

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