Banks Risk Losing More Ground to Nonbank Lenders: Report

By Broughton, Kristin | American Banker, October 9, 2014 | Go to article overview

Banks Risk Losing More Ground to Nonbank Lenders: Report


Broughton, Kristin, American Banker


Byline: Kristin Broughton

Commercial banking revenue has risen recently, but several trends threaten to put a damper on future growth, according to a report released Wednesday from McKinsey & Co.

The consulting firm's report -- "Accelerating Growth and Profits in North American Commercial Banking" -- provides a sweeping overview of challenges facing commercial banks that serve midsize companies.

Commercial banking revenue grew 4% in 2013 from the previous year, to $87 billion, according to the report. A rise in lending boosted profits as the industry largely recovered from the financial crisis.

But the sector faces several obstacles as it looks to sustain its recent growth in the coming years.

As commercial banks seek to expand, they face a declining share of the market for lending to companies with annual sales of $25 million to $500 million. Between 2012 and 2013, the market share controlled by banks fell by eight percentage points, to 73%, as business-development companies and hedge funds have expanded their commercial lending portfolios.

At the same time, profits from lending portfolios have been squeezed in recent years. Between 2010 and 2013, margins fell 30%, to 258 basis points, McKinsey said, citing data from Automated Financial Systems, a treasury management firm in Exton, Pa.

To boost profitability, many banks have relied on revenue from cross-selling products such as cash management services and corporate finance products. In particular, banks that earned more than half of their revenue in 2013 from non-lending products reported the higher measures of asset productivity -- a comparison of total revenue to loan volume.

"With returns under pressure, it's even more important to drive cross-selling," Nils Hoffman, a principal at McKinsey, said in a phone interview Tuesday, adding that cross-selling allows banks to "earn your cost of equity. …

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