1996 Forecast: Number of bank mergers tops 1995, but only a bicoastal merger will top 1995 dollar values, predicts Towers Perrin consultants.

NEW YORK--(BUSINESS WIRE)--Jan. 5, 1996--The rapid pace of bank mergers will continue in 1996 as the number of actual M&A transactions climb, though the dollar value they represent will fall, forecasts the management consultants of Towers Perrin's Financial Institutions practice in its annual set of industry predictions.

But any one of several potential east coast / west coast marriages will make the dollar values involved in 1995's deals seem inconsequential.

The consulting group anticipates that merger activity will be particularly strong in the Midwest and southern regions. Continued marketplace overcapacity and in-market, post-merger consolidation savings potential will continue to fuel M&As until, over the next few years, only two or three major banks will be left in each market. Technology and the spreading use of alternative delivery channels are beginning to play a crucial role as smaller institutions look for merger partners with deep pockets to make the significant investments required to build or upgrade "front office" marketing-oriented IT systems.

"To maintain competitive advantage -- or even parity -- with nonbanks and other diversified financial services companies in attracting and servicing retail customers, most banks and thrifts must invest in better, more efficient customer data and market information systems as a means of enabling their employees to better leverage customer relationships," said David Partridge, director of the Financial Institutions practice. "The only way some of the smaller institutions will be able to afford these systems is through formal alignment or merger with one of the bigger, better capitalized institutions."

As a result of this maelstrom of M&A activity, 1996 will be one of the most challenging years for bank employees. "As consolidation continues and electronic retail delivery systems become more commonplace, as many as 8-10% of the country's 1.5 million commercial bank employees may find themselves out of a job before the end of the year," said Partridge.

"But indiscriminately laying off employees could be bankers' biggest competitive blunder," he said. Unable to determine which employees have the right skills and capabilities to help the institution achieve its business goals, Towers Perrin believes that many institutions will mandate across-the-board departmental staff reductions, thereby letting go many of the talented people whose skills are necessary for the institution's survival.

Among Towers Perrin's other predictions for the banking industry:

o Economic trouble ahead? As the business of banking has shifted over the past decade, the industry's vulnerability during general downturns in the economy has increased. "Banks are not as resilient as they once were to recessionary times," said Arnold. "The reorganization of bank income sources emphasizing fee-based revenues gives managers less options in downturns to maintain profitability, making the bottom line more susceptible to fluctuations in the economy." Accordingly, the consultants expect major turmoil in the banking industry if (1) the economy is "driven south" by an external event, such as Bosnia, (2) large numbers of businesses start to fail, and/or (3) consumer defaults on credit continue to mount.

o A mortgage refi "boomlet" The new year will be a good one for the mortgage industry as origination volume will exceed $700 billion, spurred in part by a small boom in refinancings during the first quarter. The bad news for banks is that non-bank mortgage originators will get the bulk of the business. As a result, the consultants expect more joint ventures like the recent alliances struck between First Interstate and PHH, and Wells Fargo and Norwest. On the servicing side, at least one jumbo mortgage servicer will leave the marketplace, increasing industry consolidation.

o Banks in insurance...and vice versa. The debate over banks in insurance will come to an end this spring when the Supreme Court hands bankers -- and consumers -- a decision they'll be happy with, according to the consultants. "Banks will be given the green light to move into insurance retailing, thereby creating a powerful opportunity for banks and insurance companies to combine resources and capabilities in mutually profitable alliances," said Bill Arnold, Towers Perrin principal in the Atlanta office. "But the next, equally significant challenge for bankers will be determining how to realign the existing sales infrastructure to include insurance products. Unlike checking accounts, insurance is a product that is sold, not bought."

o "The Year of the Financial Planner." If you're making at least $35,000 annually, you can expect a sales call in 1996 from your banker, stock broker or insurance agent about preparing a personal financial plan. "As banks and other financial entities struggle to find untapped fees from new markets and products, financial planning will become the new `door opener' service," said Partridge. "Not only will this give these organizations additional fee revenue, but it also serves to support needs-based retailing and demonstrates adherence to regulators' compliance requirements."

o "Attention bankers, your thirtysomething customers have left the building..." As alternate delivery channels become more popular with retail customers, banks will grow kiosk-type outlets and shutter a greater portion of existing branches. Those branches that remain open will be conspicuously missing customers in their 20s and 30s as these particular customers conduct the majority of their financial transactions outside of the bank where they shop, live and work. "Younger consumers have a wide range of options in choosing financial services providers," said Partridge. "And since they don't have the `my-bank-looks-out-for-my-financial-security' mentality that their parents hold, they have no qualms about going elsewhere for the best deal."

o Foreign banking. Many foreign banks will close down their U.S. branches as they determine that the American marketplace is not quite what they anticipated. "Foreign banks that do not want to enter the U.S. market will buy capabilities through acquisitions rather than build them," said Partridge. "But we can expect more strategic alliances and joint ventures than outright mergers."

Towers Perrin is an international firm of management consultants with a staff of approximately 5,500 in 81 offices. The firm currently serves almost 600 financial institutions on five continents, including more than three-fourths of all Fortune-ranked banks, savings institutions and diversified financial services companies.

CONTACT: Bliss, Gouverneur & Associates

Jacqueline Ruegger, 212/840-1661