With bank profits robust. capital plentiful, and credit problems receding, the eyes of bank officials are focused sharply on their competitors. That is the key message of the 1994 American Banker-Towers Perrin Survey of bank officers and directors.

Competition, particularly from nonbank financial services providers. has emerged as the industry's No. 1 concern, according to the poll.

American Banker and Towers Perrin surveyed 355 senior bank managers and directors in July and August, asking more than 50 questions about the state of the industry and their organizations.

The great majority of bank officials said they believed the industry is becoming stronger and that their institutions have effective strategies to succeed. But most cited intense competitive pressure as the biggest challenge they face. To meet the competition, bankers said they have to improve the sales capabilities of their institutions. "A majority of those responding said their bank has to get better at retailing," noted David M. Partridge, who heads Tower Perrin's financial institutions practice.

But many questioned whether they have the organizational capability to do it. That potentially poses a major issue for the banking issue.

Last year, the Towers Perrin survey showed productivity and cost control were the leading issues for bankers. In 1992, officials cited relations with regulators as their top concern.

Bankers see competition across a broad range of products and customer segments. But pressures from other banks is felt most intensely in the deposit and lending areas that traditionally have been at the core of the banking business.

Survey participants said competition from other banks is most acute in the area of deposit accounts, cited by 61.9% of respondents. That was followed by commercial loans, cited by 54.3%, and mortgages, by 53.6%.

When it comes to competition from nonbank financial institutions, 50.2% of bank officials surveyed identified mutual funds, a vital area for growth as the market share of traditional deposits shrinks, as the top battleground.

But bankers also feel pressed in such traditional product areas as mortgages, cited by 47.9% of respondents, and deposit accounts, cited by 43.8%

Still, bankers said competition may ease in the near future. In three years, survey participants said they expect significantly less competition from both banks and nonbanks in virtually all product areas.

Two exceptions were commercial loans and small-business lending, where bankers foresee more pressure from nonbanks by 1997.

Looking at retail customer segments, bank officials said nonbanks present the greatest threat with young customers who are in the earliest life-cycle stages. By contrast, bankers said they do best with retired consumers.

Among commercial segments, participants said nonbanks are strongest with large business, while banks are most successful with small businesses.

What will bank officials do to meet the competition? The survey showed that acquiring other banks or thrifts was the most likely strategic response, cited by 86.9% of participants.

Asked their reasons for acquiring banks or thrifts, 71.2% of those surveyed said they wanted to build critical mass within defined geographical markets; 67.3% said they expected to improve profitability and 62.8% said they hoped to save costs.

At the same time, a significant minority of bank officials, including many who said they expected to do acquisitons, predict that their institutions will be taken over by other banks.

Some 39.2% of respondents said it was likely their banks will merge with another bank, while 3.9% expected to merge with a nonbanking institution.

Besides acquisitions, bank managers and directors said they would follow two main operating strategies: 85.3% said their banks would focus on retailing, including activities such as cross-selling and customer needs assessment.

And 76.1% said they would focus on optimizing the performance of their bank's portfolio, that is, getting the maximum return on risk-adjusted investment.

Bankers were generally confident that their institutions have what it takes to successfully carry out strategies. Overall, 87% of participants said they were either very satisfied or somewhat satisfied with their plans for building organizational capabilities.

And 71% said they were satisfied with how well those plans were understood within their institutions.

Nevertheless, the survey reyealed significant gaps between what managers and directors said their banks needed to do to win in the marketplace and how well they thought their in institutions were performing those tasks.

For example, 72.7% of banks managers cited management of information technology as a capability that is needed to win in the marketplace. But only 24.2% of managers rated their institutions as superior in the technology area.

Similarly, four different retailing capabilities -- customer retention; customer needs assessment; cross-selling; and new customer acquisition -- were cited by between 70% and 80% of managers as crucial to success.

But only between 33% and 48% of the managers considered their banks superior in these retailing disciplines.

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