Commercial banks have experienced a recent period of robust earnings. These gains are the result of three factors: declining loan losses, increased operating efficiencies and a favorable interest rate environment. There are indications that income gains may be slowing, however. Profits are being squeezed because of intense competition for new business and declining loan spreads. In this environment, bank managers continue to explore new profit opportunities.
One area often overlooked in the effort to boost profitability is the bank's existing loan portfolio. Rather than look for new marketing opportunities, bankers should take Shakespeare's advice and look "not in our stars, but in ourselves." Modern portfolio theory (MPT) and new tools for analyzing risk and return offer opportunities for bankers to improve profitability without incurring additional risks or costs.