The consolidation of the banking industry has reached a frenzy as banks try to increase profitability. One way to bolster profits is by acquiring nonbank businesses such as mortgage companies, consumer finance units, and credit card operations.

These were some of the key points made in a forum at the American Banker's first annual mergers and acquisitions forum in New York.

H. Jay Sarles, vice chairman of Fleet Financial Group, and Carole S. Berger, a managing director at Salomon Brothers Inc., addressed the building of nonbank businesses. The session was moderated by John C. Morris, managing director at Smith Barney Inc.

Benefits for banks entering nonbank businesses, Mr. Sarles said, include:

*An increase in long-term profits and an improved stock price.

*An improved revenue mix as fee income rises and drives up future earnings.

*A diversification of geographic exposure to protect a bank's business in the event of a regional recession.

*Potential cross-selling opportunities.

"I believe in running nonbank operations, there are very strong reasons to expand in this way," Mr. Sarles said. "But I caution you, it is not easy."

Culture clashes between banks and their nonbank operations are often a source of trouble, Mr. Sarles said. Banks should try to give these companies independence, he added.

Mr. Sarles also addressed the choice between buying or building nonbanking operations.

"There is no way to build a mortgage company," Mr. Sarles said, if a bank wants to have the expertise needed to run such an operation. It is better to buy in order to get the management ability, economies of scale, and necessary technology.

Ms. Berger focused on the questions she gets from institutional investors asking about bank investments.

She said she thought that servicing customers was critical in running a nonbank operation. The service, or lack of it, will affect growth and profitability, and will in turn eventually divide banks into two groups: those with revenue growth that are attractive for a merger, and those without revenue growth and thus not attractive.

"It is possible those that fall too far behind in technology and growth in the nonbanking business will be left as the wallflower at the dance," Ms. Berger said.

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.