Warning bankers that high-tech companies may drive away with customers on the information highway, Citicorp chairman and chief executive John Reed said the industry must face up to dramatic changes which will occur over the next 10 years.

Addressing the Bankers Association for Foreign Trade convention held here this week, Mr. Reed divided the issues facing bankers into three distinct categories: structural, geographic, and technological.

Structural changes, including a shift by companies to direct capital- raising in the debt and equity markets, have forced banks to start their own capital markets businesses or expand lending to smaller and midsize companies.

Neither alternative is satisfactory, Mr. Reed said. Commercial banks that have succeeded in converting themselves into investment banks generate average returns on equity of between 12% and 14%, or well below the 20% that successful commercial banks achieve.

"Once you approach the capital markets, your wages go up, your returns go down and it winds up better for employees than for shareholders," Mr. Reed said.

Banks that turn away from the capital markets in favor of servicing the corporate middle market can expect returns of 20% or more. The problem, Mr. Reed added,"is that this market is not growing. Banks are fighting to gain a bigger share of the pie."

Geographic changes, including interstate banking in the United States and the creation of regional markets in Europe, Latin America, and elsewhere, are also accelerating. These, too, will have to be taken into account, he said.

Meanwhile, technological changes contain some of the greatest promise and biggest risks. "Banking is still fundamentally talk," Mr. Reed said. "But it is going to be possible to have that talk done over the Internet."

Mr. Reed predicted, however, that the number of banks eventually operating over the Internet would be in the "10s" - not "hundreds, or thousands."

The danger, he warned, is that banks could face a new wave of disintermediation, this time in consumer activities, from communications networks and software companies.

"There's a real risk we will complete a highway over which our competitors will drive," he added, noting that banks similarly promoted credit cards only to see that market invaded by nonbanks.

Citicorp, he pointed out, has steered away from capital markets and middle-market banking in developed countries in favor of corporate banking in emerging markets and consumer banking in both emerging and developed markets.

In consumer banking, Citicorp sees its role as facilitating and expediting payments, and, increasingly, financial planning.

In commercial banking, Citicorp will expand locally in emerging markets around the world where it can achieve a 30% return on equity, he said.

Mr. Reed added that "there will be winners and losers, those who get it right and those who don't. It's a humbling experience."

Bankers and analysts at the convention had a mixed reaction to his remarkes.

"Whether or not you think capital markets are a viable strategy depends on who you are and what choices you have made," said one executive who declined to be identified.

Another banker, who also declined to be identified, predicted that Citicorp has only a few years to make good on its own strategy for expanding in emerging markets. "It's only a matter of time before local competition catches up with them and disintermediation takes effect," he said. "They may have an advantage now, but it's a short-term advantage and nothing lasts forever."

But Salomon Brothers analyst Diane Glossman said Citicorp is "ahead of the game" relative to other banks.

"The issue is not just volatility but what do you have to pay for (a capital markets strategy). It's kind of hard to justify all the investments."

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