Bloomberg News

LONDON - J. P. Morgan & Co. said in a study that profits for 27 major European banking companies could drop an average of 17% due to Internet competition. This implies a 15% drop in their market value, the banking company said.

Without higher revenue to offset reduced margins caused by online banking, companies would have to cut retail banking costs 19% - or "way beyond anything we have seen from the banks to date" - to maintain this year's profit levels, the study said.

J.P. Morgan, which is spending $1 billion this year on the Internet, reduced its overall recommendation on European banks to "neutral," from "overweight." However, it said that financial stocks "with many of the ingredients for success" include Spain's Bankinter SA, Credit Suisse Group, Sweden's SEB AB, the online stock broker Consors Discount Broker AG, and MLP AG, Germany's largest independent insurance broker.

"Faced with potential earnings losses on this scale, it is clear that the banks will have to cut costs," Morgan said. "Yet the banks' track records on cost cutting are not that encouraging."

Only half of the banking companies surveyed improved their cost/income ratios during the last three years, the study said. "We see the findings of this study as unsettling for our view on banks."

In 2003 about 55 million Europeans, or 22% of consumers, are expected to bank online, buying more than 15% of their financial products through the Web, the study said.

Margins will be reduced as people shop for lower costs and financial companies cut prices in order to buy market share, it said. Deposit accounts are most vulnerable, followed by mutual funds. The study assumed that deposit margins will drop 20 basis points, mortgage margins 10 to 20 basis points, and mutual fund fees 25 basis points.

"Banks should seek to take out costs ahead of time and prepare themselves to live within a 1% world, since the margins on many financial products will be below 1% in the future," the study said.

The 27 banking companies in the survey came from Austria, the Netherlands, France, Germany, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.

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