The credit crisis has prompted an unprecedented reshaping of the banking sector this year, punctuated by whirlwind marriages and shocking exits.
But observers said that the enduring crisis is enhancing two existing bank models rather than carving out entirely new ones. They expect it to make the biggest banking companies even bigger, while the rest of the field probably will grow increasingly conservative after learning painful lessons from real estate lending excesses.
These trends, they said, will amplify the universal framework, under which Bank of America Corp., JPMorgan Chase & Co., and Citigroup Inc. try to blanket financial services, and the "back-to-basics" design, in which community banks compete first to gather deposits and then to sell carefully underwritten loans.
The "wave of the future will be the basic business of banking — know your customer, understand their business, and provide great service," H. Lynn Harton, interim chief executive of the $13.7 billion-asset South Financial Group Inc. in Greenville, S.C., said in an interview last week.
Like many others, South Financial is reverting to that strategy after being slammed by big credit losses on loans made in the overheated Florida market to developers the company did not know well. Mr. Harton was South Financial's chief risk officer until October when he took over after the abrupt retirement of Mack I. Whittle Jr.
"The financial services industry that emerges from this crisis will look much different," Kenneth D. Lewis, Bank of America Corp.'s chairman and chief executive, said as he accepted American Banker's 2008 Banker of the Year award Dec. 4 in New York. "Like the barbell that many have been predicting for years," he said, "it will include a handful of very large, diversified, global banks at one end and thousands of smaller community banks on the other."
With its deals this year for the investment bank Merrill Lynch & Co. Inc. and the mortgage giant Countrywide Financial Corp., the $1.83 trillion-asset B of A in Charlotte is becoming ever more a universal bank. And the same is true for JPMorgan Chase & Co. after the $2.25 trillion-asset New York company bought Bear Stearns Cos. and the bank assets of Washington Mutual Inc. this year.
What's more, the major investment banks left standing on Wall Street, Morgan Stanley and Goldman Sachs Group Inc., are approaching universal status from the other end by becoming traditional bank holding companies and signaling that they each would like to build deposits through retail bank deals, analysts said.
"With Morgan Stanley and Goldman creating more developed banking models, trying to grow core deposits, those are important changes in the competitive picture at the top," Brett Rabatin, a senior bank analyst at First Horizon National Corp.'s FTN Midwest Securities Corp., said in an interview last week. "At the other end, I think, the smaller banks will find ways to take share from the midsize ones, and so where you will see things shrink is probably in the middle; that's where you'll see more consolidation or more of regulators stepping in with solutions."
To be sure, exceptions will emerge to the models, and some of the biggest banks themselves may not survive the crisis in their current form, particularly if, as expected, regulators are empowered to more closely scrutinize banks by the new president and Congress.
"There will likely be quicker recourse to using enforcement powers and less forgiveness," Michael Bleier, a financial services lawyer at Reed Smith LLP in Pittsburgh, wrote in an e-mail to American Banker last week. Banks "need to make certain they have good control systems in place."
Among the largest banking companies, Citigroup faces the most immediate pressure. After four-straight quarterly losses, skeptics say the $2.1 trillion-asset New York company is too large and far-flung to be managed effectively. And despite Citi executives' insistence that their universal model is the key to success — finance chief Gary L. Crittenden said in an interview last month "the model won't change" — many investors and analysts have called for the banking behemoth to be broken up.
Moreover, in Mr. Lewis' view, even the biggest banks will have to forget the rampant growth pace that coincided with the inflation of a housing bubble and instead focus on steady, careful expansion. Tougher regulations and a heightened focus on risk management will moderate growth and limit the creation of financial instruments that could create new but risky revenue streams.
"It would be fair to say that the growth in financial services was overdone," Mr. Lewis said. "We will be a smaller industry with fewer overall workers and claiming a smaller portion of national income and gross national product. That's not a bad thing."
And some large banking companies say they are content to expand their existing businesses, or even their geographic reach, without adopting the universal model.
Wells Fargo & Co. in San Francisco, for one, plans to close its purchase of Charlotte-based Wachovia Corp. by yearend, a deal that would give Wells a huge new presence in the South and Southeast, as well as double its branches and deposits. However, speaking at a conference in New York last week, John G. Stumpf, the $622 billion-asset Wells' chief executive, said it would add investment banking capabilities with Wachovia but has little interest in following B of A's lead and acquiring a major investment bank. It is "not compatible with our structure," he said. Wells is focused on becoming a truly national retail banking company, he said.
U.S. Bancorp, too, is not convinced it is essential to be among the very biggest. The $247 billion-asset Minneapolis company is, for now, content to expand its presence in the Midwest and West as a superregional. It most recently expanded with two California deals last month and its chief executive said he is eyeing more acquisition opportunities in the West and possibly in other regions.
"I'll be open to that, but it won't be a dominant goal of ours," Richard K. Davis, U.S. Bancorp's chairman and chief executive, said at a conference in New York last week. "Size isn't everything," Mr. Davis said. "We don't seek a transformational outcome just because it might be available. I would welcome an opportunity where we could expand our breadth. But for me, depth first and breadth second."
Meanwhile, analysts say smaller regional and community banks are likely to stay focused on careful lending and growth not based on new products but on attracting customers from competitors with improved customer service. Some observers say that, rather than propping up companies deemed too big to fail, the federal government could jump-start a flow of credit by injecting capital into smaller banks to help them lend more freely until the economy improves. "The smaller regionals and community banks are good at the basics and will vie for more share," Mr. Rabatin said. "The communities are already good at knowing their customers, good at underwriting safe loans."