Banks: Are They Boring?

We can trace the history of banking to the earliest civilizations. The early bank-like organizations were based on the barter system and mainly dealt with agricultural products. During the time of Julius Caesar, Rome began the seizure of lands by creditors, thereby creating a milestone in asset-backed lending. Deposit-taking banking developed further during the Renaissance era with the city-states of Venice, Florence, and Milan. The Dutch and British governments of the 16th and 17th centuries further developed the banking system with their royal charters, some of which were set up explicitly to finance their respective trading companies. Banca Monte Dei Paschi di Siena, an Italy-based bank, was established in 1472 and continues to remain in operation.

Central banks developed parallelly to set reserve requirements and establish monetary bases. The first reserve bank was the Swedish Riksbank, established in 1686.

Colors and Flavors:

There are several types of banks: commercial banks, retail banks, investment banks and private banks being the four broad categories.

Commercial banks are focused on businesses and offer credit, current accounts, and other financing facilities like lines of credit to both large and small corporations. Examples include Citi and Bank of America.

Retail banks are more consumer-focused, offering checking accounts, credit cards, and other consumer loans. Examples of retail banks are Wells Fargo and TD bank. However, most large banks operate both in the commercial and retail space.

Investment banks are specialized banks that help businesses raise capital in the financial markets. Investment banks assist in debt offerings, IPOs, and offer advice in M&As. Some of the largest investment banks include Goldman Sachs and Morgan Stanley.

Private banks mainly deal with ultra-rich consumers and are more focused on wealth management. Examples include UBS and Credit Suisse.

The U.S. is home to some of the largest banks. The chart below gives a snapshot of the asset sizes of some of the U.S. banks

Source: Federal Reserve

Big and small names:

We can also view banks within the U.S as national and regional. Let us look at a few of the top banks.

Large U.S banks have a pan-nation presence, and a few have a global footprint.

Wells Fargo & Co is one of the oldest financial services companies in the U.S with its main subsidiary Wells Fargo bank having a pan-national presence. The bank has over 8000 branches and more than 12,000 ATMs.

Formed by the 2000 merger of Chase Manhattan bank and J.P Morgan Co., the behemoth that is JP Morgan Chase offers a variety of financial services.

Originally formed by the merger of NationsBank and BankAmerica in 1998, Bank of America acquired Merrill Lynch in 2008, making itself one of the largest banks in the U.S. Roughly 11% of all U.S bank deposits are serviced by BofA.

Among the top four banks in the U.S, the New York headquartered Citi has businesses in over 160 countries and services over 200 million customer accounts.

The U.S is also home to several regional and community banks. Some of these are as follows:

Based out of the Minneapolis area, US Bancorp is a bank holding company that operates the U.S Bank. Its presence is predominantly in the Western and Mid-Western states of the country.

Formed by the merger of BB&T and SunTrust bank in 2019, Truist is a holding company that operates banks in 15 of the 50 states and in the D.C area.

Noted for its personalized customer service, First Republic mainly operates in California, Oregon and in many of the Eastern States of the U.S.

Publicly traded investment banks include:

Goldman Sachs is one of the largest investment banks in the word and advised on deals worth $29.0 billion in 2020.

One of the mid-sized investment banks, Stifel operates in the market for deals ranging between $500 million and $5 billion. Among equities, it holds the top position in underwriting for market caps less than $500 million.

Another mid-sized investment bank, Houlihan Lokey has been growing in the ranks and league tables in the last few years.

The U.S. is the favored destination for listing foreign entities. Several non-U.S banks trade as ADRs in U.S. exchanges. Noted few include HSBC, Barclays, both from the U.K., Deutsche Bank, BBVA, Banco Santander, UBS and Credit Suisse from Europe, Mitsubishi UFJ, Nomura, and Mizuho Financial from Japan, and Itau Unibanco, Credicorp and Banco Latinoamericano de Comericio (Bladex) from Central and South America. India’s own ICICI Bank and HDFC bank, too, trade in the U.S. as ADRs. Most Canadian banks also trade in the U.S., including Bank of Nova Scotia and Toronto Dominion Bank.

Recent trends:

The global financial crisis of 2008 ushered in a new era in banking. Central banks of many developed nations propped up their economies by following ultra-loose monetary policies and large asset-buying programs.

Source: OECD

The U.S, Eurozone, and Japan continue to buy bonds in large volumes. The Japanese central bank even buys ETFs of common stocks. Low-interest rates have shrunk bank margins in general, and many banks now look for other sources of revenues. Many large banks increasingly rely on proprietary trading to offset some of the declines in net interest margins. Asset management is another area where the banks have increasingly relied on in recent years.

Technology in Banking:

Banks were one of the early adopters of technology with ATMs, online banking, and mobile banking. Banks account for a large proportion of revenues of the world’s leading IT services firms, having spent roughly $540 billion on IT in 2019. The proliferation of fintech and other innovation has created several new opportunities in the banking industry. The fintech trend has spawned entirely new businesses and the use of many new technology features within existing banks. There are banks now that operate entirely online.

Ally Financial through its Ally Bank is a full-service online bank in the U.S and provides a range of services through its app.

Synchrony Bank is another online bank and provides private label credit cards partnering with Amazon, Lowe’s, Gap, and Verizon.

LendingClub is a Fintech bank providing banking services such as checking accounts and personal loans, online.

Artificial intelligence and the use of virtual assistants are also a growing area within banking. Examples include ENO by CapitalOne and ERICA by Bank of America. These digital assistants assist consumers with various tasks such as fraud alerts, bill payments, and money transfers.

Read our earlier blog on the fintech revolution in the wealth management industry.

Recent stock market performance:

Understanding that banks do more than just lending money makes one see the industry through a new lens. Banking is an attractive investment area as banks are typically closely tied with overall economic growth. Bank stocks act as a barometer of the stock market, especially in developing countries.

Investors seeking banking exposure can do so by buying individual stocks. For those seeking broader exposure to the banking sector, certain ETFs are also available, such as SPDR S&P Bank ETF (KBE).