Bumpy road ahead for U.S. banks: Stay away?

Streamlining Revenue and Cost Lines Will Not Be Easy

Banks’ efforts to strengthen top line by focusing more on non-interest income have not been working effectively. Opportunities for generating non-interest revenues — from sources like charges on deposits, prepaid cards, new fees and higher minimum balance requirement on deposit accounts — will continue to be curbed by regulatory restrictions and still shaky economic recovery.

Further, increasing propensity to invest in alternative revenue sources on the back of an improved employment scenario may result in higher non-interest income. But grabbing good opportunities will require higher overhead.
Moreover, lingering legal and restructuring costs could strain the key strategy to stay afloat through cost containment.

Weakening Quality of Earnings

Better-than-expected earnings have been the key driver of bank performance in the last few quarters, but primarily conservative estimates led to the surprises. Also, the ways banks are generating earnings seem a stopgap. Measures like forceful cost reduction and lowering provision may not last long as earnings drivers.

Continued narrowing of the gap between loss provisions and charge-offs will not allow banks to support the bottom line by lowering provision. Also, competing with other industry participants to grab new business opportunities would require significant spending.

Unless the key business segments revitalize and generate revenues that could more than offset the usual growth in costs, bottom-line growth will not be consistent.

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