Meredith Whitney made a splash nearly three years ago predicting the demise of Citigroup’s (NYSE: C) dividend. In a recent report, she presents a dismal view of the future for profit strapped U.S. banks. Whitney expects 5,000 bank branches to close during the next year and a half, which would amount to about 5% of bank offices nationwide.
Over the course of the past two decades, we have seen the formation of megabanks like Bank of America (NYSE: BAC) and JPMorgan Chase (NYSE: JPM) following deregulation. Increases in technology compounded by regulatory shifts have made it harder for the small banks to stay in business. Currently, there are roughly 8,000 U.S. banking institutions, down from 12,000 in 1992.
The Dodd Frank Act passed this summer which overhauls oversight and control will cap bank profits in many areas, causing cuts in the thin margin retail bank branches. Whitney commented that “The most regrettable unintended consequence of some of the quickly written regulatory reform, we believe, will be the inevitable ‘de-banking’ of the U.S. financial system, and warns that bank profits are in “structural decline.” We believe the greatest unintended consequence of regulatory reform, post credit crisis, will be the banks’ ability to price for risk,” she writes. “Owing to an inability to price for certain risk, we believe the banking industry will simply no longer be able to service upwards of 10% of their current customer base.”
But Whitney notes that problem banks are far from the only problem. The ranks of the unbanked will rise to 41 million households in 2015 from 30 million now, she says, as bankers reconsider the costs and benefits of all manner of products.
