BANK PROFIT MARGINS SQUEEZED IN 1995, PREDICTS TOWERS PERRIN CONSULTING GROUP; The Twilight of the Thrift Industry.

NEW YORK--(BUSINESS WIRE)--January 9, 1995--In 1995, expect U.S. commercial banks to run into a severe primary spread squeeze, according to management consultants at Towers Perrin. While assets will flow back into bank CDs, securitizeable loan yields won't rise as quickly due to dramatic increases in non-bank loan origination competition and Wall Street-driven demand for investment-quality, loan-backed securities.

"In the retail marketplace, the interest rate rise will significantly increase customer deposit activity," noted David M. Partridge, managing principal at Towers Perrin and Director of its Financial Institutions practice. "This environment presents a major opportunity for banks that can capture economically attractive new customers. However, the industry is still crippled by high-cost funding infrastructures, resulting in portfolio business margin compression and falling economic performance for most players."

On merger and acquisition activity, Partridge observes "given the ever-expanding geographic ambitions of a number of U.S. banks -- and cash-rich international financial services conglomerates -- falling stock prices will prove hazardous to the independence of mid-sized institutions with assets from $1 billion to $20 billion."

The consulting group also expects mortgage origination volumes to remain significantly below 1993-94 record levels. "Combined with the downward pressure on earnings from variable rate mortgages they've offered in the past 24 months -- mortgages that can't be re-priced as fast as their underlying cost of funds -- some thrift institutions will be back in trouble," predicts Partridge. "We'll see more headlines about low-priced thrift acquisitions by banks that know how to capture customer economic value."

Among Towers Perrin's other predictions for the banking industry: o Prime Rises 300bps: The Federal Reserve will continue to hike interest rates throughout 1995, driving up the prime another 300bps by the end of the fourth quarter of 1995. Money is expected to pour back into CDs, fueling bank lending activity. "The downside is that banks may once again be tempted to make less than top quality loans in order to maintain yield and volume," says Partridge. "Watch for large loan loss reserve additions in 1995 to add pressure on earnings."

o Bank Mutual Funds Wither: "Many bank-run mutual fund program will miss their 1994 targets and will be revising 1995 and 1996 projections accordingly," according to Donald E. McNees, a Towers Perrin principal. "This failure, generated by heavy bond fund outflows, will serve as the death knell for proprietary funds as banks cut their losses and decide to buy mutual fund companies or asset managers instead." McNees adds that strict new Securities & Exchange Commission regulations for bank securities programs may accelerate the tide of banks exiting the business.

o Bank at Home Redux: More banks will focus their retail network expansion to serve consumers where they live, work and shop. The consultants expect "bank at home" programs to begin to re-emerge using technologies like the Internet. "Bank at Work" programs, now being aggressively built by a few institutions such as Chemical Bank, will expand through the 401(k) record-keeping services many banks are already selling to corporate Human Resources departments. And BankSouth of Atlanta's trend-setting 24-hour grocery store-based service, combined with its tele-banking, will be replicated in other regions.

o Consumer Turnover Predicted: Angered by rising fees and cost add-ons, consumer loyalty levels will trend downward in 1995, say the consultants. "Simple DDA accounts, once the stable foundation of customer relationships, are becoming increasingly mobile as consumers become aware of rising total costs and look elsewhere for better deals," says Partridge.

o Regulation Changes Will Focus on Banks in Insurance: The courts, the national banking regulators and even the state insurance regulators are waking up to what the U.S. consumer marketplace and the rest of the world have already determined -- bank participation in insurance sales is good for the consumer. Like NOW accounts in 1980, Congress will ratify bank participation in insurance once the marketplace makes it a fait accompli. "Outside of rapid insurance changes and some re-regulation of bank securities activities, 1995 will be a relatively quiet year on the legislative / regulatory front," says William M. Arnold, Jr., a Towers Perrin principal and manager of its Atlanta General Management Services office. o California Thrifts Disappear: The Southern California economy, slowly recovering its economic health, will be jolted by acquisitions. "Depressed thrift stock prices and the end of any barriers blocking interstate banking will invite acquisitions of at least two of the big California thrifts," said Partridge. "We'll also see a new value paradigm enter into acquisition pricing as acquirors with high levels of marketing skills set prices based upon the prospective economic value of the target's customer base," he said. "It's a prospective 'share of wallet' value pricing game now." o Risk Financing Grows Within Wholesale Banking: "Commercial lending-like vehicles are mutating to serve risk financing functions at the larger, more sophisticated banking houses and replacing reinsurance in some large insurance carriers," says Bill Arnold. "New banking activity in this area is taking advantage of concerns with Lloyd's ongoing capabilities. We expect increasing sophistication in the secondary market for risk, and wholesale banks may emerge as major intermediaries in these markets," he said.

Towers Perrin is an international firm of management consultants with a staff of approximately 5,000 in more than 70 offices. The firm currently serves almost 600 financial institutions on five continents, including 50 of the Fortune-ranked commercial; banks and a significant number of the top-ranked diversified financial and savings institutions. The firm's general management consulting services group has a specialized practice in the banking and finance industries.

CONTACT: Bliss, Gouverneur & Associates

Jacqueline M. Ruegger, 212/840-1661