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1.Introduction to the Banking, Mortgages & Credit Industry
The banking industry continues to globalize and evolve rapidly.
Vast, national and global bank holding companies continue
to grow, both through acquisitions and through the opening
of new facilities and business units. New business opportunities
are opening up globally for major banks, especially in such
booming markets as China and India. Cross-border investments
in banks are growing.
In the U.S., the number of branch banks has expanded rapidly
as firms open not only traditional branches but also branches
in alternative locations such as supermarkets and Wal-Mart
stores. Meanwhile, hundreds of thousands of ATMs across America
are becoming more sophisticated and multi-task capable, making
them virtual branches. Also, consumers and businesses are
becoming much more reliant on online management of their bank
accounts as the number of homes and businesses enjoying broadband
access to the Internet has reached true mass-market scope.
By early 2006, nearly 50 million U.S. homes and businesses
will have broadband, and broadband fees are dropping rapidly.
Non-bank companies remain a serious competitive threat to
traditional banks. Retailers, automobile manufacturers, stock
brokers, insurance companies and other business sectors are
offering a myriad array of bank-like services, from loans
and mortgages, to credit cards, to money market accounts with
checking account-like features.
The credit card industry is evolving as well. A truly revolutionary
wave of “smart” cellular phones that act like
credit cards and also manage financial accounts via wireless
Internet connections is sweeping Asia and slowly taking root
in Europe and the U.S.
In Europe, the major bank holding companies are following
the lead of their U.S.-based peers: making major acquisitions
and cross-border investments while relying more and more on
technology to make operations more efficient. European Union
regulations have led to the cleaning up of balance sheets
at Europe’s banks and the implementation of better accounting
practices.
Meanwhile, around the world, major bank companies are using
special banking units to provide services that conform to
the tenets of Islam in order to take advantage of the rapidly
growing Muslim population and the growing income of oil-producing
Muslim nations and Muslim-owned businesses. (The Islamic concept
of “Sharia” strictly limits the use of interest
payments. Instead, many business deals must be structured
on lease, rent or other alternative contracts in order to
be acceptable.) Many Muslim-owned banks are competing fiercely
while enjoying soaring growth.
One of the big questions facing the banking and lending sector
is how well Americans will deal with their high level of debt.
At the end of 2005, American households owed a record high of
more than $10.2 trillion, including more than $8.1 trillion in
single-family mortgages and more than $2.1 trillion in consumer
debt such as auto loans and credit card debt. This is due to
several factors. Among them are aggressive lending practices
(including lending to individuals with sub-par credit histories),
low interest rates, consumers' willingness to borrow against home
equities, soaring homeownership rates (with attendant high rates
of mortgage debt), soaring home prices, aggressive use of income
tax cuts and rebates by the Federal Government in a successful
effort to move America's economy beyond the twin blows of 9/11 and
the technology industry bust of 2000, and aggressive offers of low-
to no-interest-rate automobile loans that have driven new car sales.
As 2005 ends, the U.S. economy has enjoyed several successive quarters
of growth, and corporations have enjoyed robust growth in sales and profits.
Strong job creation has resulted, which has generally enabled consumers
to handle their high debt levels. However, America is in a period of
rising interest rates, and inflation looks troublesome as well, particularly
due to high energy and health care costs. Consumers may soon be hit by
much higher payments on mortgages and loans that have adjustable interest rates.
Meanwhile, in the mortgage sector, industry-analysts are keenly watching to
see whether home sales will remain strong-or if the phenomenal long-term
rise in home values will lead to a real estate bubble bust. A continued
strong market for homes would keep the mortgage industry robust. Also,
mortgage lenders have introduced a long list of innovative products designed
to make it easier to borrow while lowering monthly payment requirements.
These products range from zero-down mortgages to 40-year, fixed-rate loans
to "option" loans that allow the borrower to defer a large part of each
moth's payment.
In corporate debt, industry observers and corporate debt lenders and
underwriters are hoping for continued growth in corporate profits,
reasonable growth in corporate spending and relatively low interest
rates. Such a scenario would lead to continued strong profitability a
t major banks and at investment banks that underwrite corporate bonds.
On the federal level, public debt continues to grow. For example,
it soared to $7.4 trillion in 2004, 30% higher than in 2000. Over
one-fifth of that debt was owned by foreign investors, placing the
United States in an unenviable position as a debtor nation. At an
accelerating rate, Americans are buying more from Asian nations than
those nations are buying from the U.S. U.S. treasury borrowing from
foreign nations climbed to $620 billion for the year, a record high
at 5.7% of U.S. GDP. Japan's foreign reserve holdings in U.S. dollars
grew to about $817 billion in 2004 from about $300 billion in 2000.
China's holdings grew to nearly $600 billion from less than $200 billion
over the same period. As 2005 ended, interest rates on U.S. treasury
debt were climbing. The size of the U.S. federal deficit, increasing
signs of inflation and the weakness of the U.S. dollar all point to higher
interest rates for 2006.
Meanwhile, extremely high prices per barrel for oil imports are leading
to much larger U.S. trade deficits with such oil producers as Saudi Arabia.
Nonetheless, the high cost of oil and natural gas doesn't necessarily spell
doom and gloom as it did in the oil crisis periods of 1973-74 and 1979-80.
In those former price spikes, oil prices nearly tripled over periods of a
few months as suppliers in the Middle East made it harder for purchasers to
obtain crude as a political statement. In the recent situation, oil prices
have risen in a generally steady fashion over a period of about two and one-half
years-thus it has been less of a shock. Even more helpful is the fact that the
U.S. economy uses much less energy per dollar of GDP than it did in the 70s and
80s. This is due to a large number of factors, including better energy efficiency
in many types of factories and equipment, and an economy that is based more and
more on services and less and less on heavy manufacturing.
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