New Capco Research Finds That the U.S. Banking Industry Will Struggle to Sustain Profitable Growth, with 2007 a Challenging Year; ''Bad Situation Getting Worse''.

NEW YORK -- Before the end of 2007, the U.S. banking industry will experience the start of a prolonged profit compression as expenses begin to grow faster than revenues, according to new research from Capco, a global provider of consulting, processing services and technology solutions to the financial services industry. A new white paper published by Capco, titled "A Bad Situation Getting Worse - The U.S. Banking Profitability Crisis" outlines the factors creating pressure on industry profits and offers recommendations on what can be done to return the industry to profitable growth.

Building on the broad themes outlined in a related white paper published by Capco in October 2004 ("The Emerging Crisis in U.S. Banking Profitability"), the paper identifies a fundamental shift in industry revenue generation, with U.S. banks migrating away from interest-income to a larger portion of non-interest income. As the banking industry increases its reliance on non-traditional banking activities that generate fee income in an effort to diversify its revenue stream, there is a significant increase in the costs required to generate those revenues, putting further pressure on profits.

"Declining profitability is an inevitable reality for the U.S. banking industry," said Adam Dener, Capco partner and co-author of "A Bad Situation Getting Worse." "Over the last decade the industry has undergone significant consolidation, yet banks have not reaped adequate rewards through greater productivity as a result. Likewise, investments in technology have to date yielded only incremental changes in bank efficiency ratios.

The industry faces significant challenges, but strong leadership and a commitment to transforming established business models can ensure that profit compression does not become a long-term trend."

A copy of the complete white paper is available at http://www.capco.com/general.aspx?id=464

Research Highlights

The research demonstrates that improvements in industry productivity have been insufficient to offset the constrained revenue dynamics of banking. While the industry continues its migration towards increasing fee income, with its associated focus on proprietary trading (among those firms that are capable of providing capital markets services) amid inadequate operational leverage and industry compensation dynamics, it continues to offer limited relief from the pressures on profitability. Additional research highlights include:

--Banks have experienced a reduction of over half of their interest income from 1984 relative to today

--Since 2000, banks with a majority of income coming from fee-based activities significantly underperformed those that earned a majority of profits from interest-income

--By 2010, Capco forecasts the five year Compound Annual Growth Rate (CAGR) for U.S. bank expenses will run at 4.7% versus 4.2% for revenue

--Despite industry consolidation and technology evolution, over the last 20 years staff and property costs have remained largely unchanged

--The top 10 banking companies in the U.S. now hold 51.5% of all bank assets, up from 19.5% ten years ago. However, a look at efficiency ratios indicates that scale in concentration has not proven to offer significant performance enhancement.

About Capco

Capco is a leading global provider of integrated transformation services and solutions designed specifically for the financial services industry. These services - consulting, processing services, and technology solutions - leverage Capco's deep expertise in the corporate and investment banking, asset management, hedge fund and retail financial services segments. For more information, please visit www.capco.com.