Banks are constantly seeking to increase revenues in an effort to boost profitability and returns on capital for its investors. Strong performers do not settle simply for revenue growth, but strive for profitable and sustainable revenue growth. However, banking is a highly regulated industry in which regulators focus on banks' abilities to maintain adequate balance sheet reserves as a way of minimizing the risk of bank failures, and attempts to boost revenue must fit in this scheme for managing risk.
One of the preferred methods for increasing revenues is by increasing loans to borrowers such as home buyers, real estate developers and credit card users, because loan growth is a key metric used by investors to analyze banks. However, in increasing loan balances, banks are cautious that loans meet the banks' internal credit requirements and are not too risky, so that the default rate of the banks' loan portfolios does not increase. This can be difficult, as the lending market is highly competitive. Competition comes from both small, local banks with deep roots in the local economy and from much larger national banks with greater access to capital.
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Shifting Investment Mix
Banks often invest a portion of their earning assets in Treasury bills, which are considered to be high-quality, liquid investments due to the United States' strong credit profile, generally healthy economy and reputation within the capital markets. Treasury bills are another form of loans, but instead of lending to companies or individuals, the bank is lending to the federal government and receives interest income in return. Banks can shift their Treasury bill holdings to longer-term Treasury bills, which pay higher interest rates. A more aggressive tactic is to shift assets typically invested in Treasury bills to higher-yielding loans destined for companies and individuals.
Increasing Fees and Other Income
The banking industry has long recognized the need to sell more services to existing customers. Banks use a wide variety of tactics to increase revenues by providing other banking services in excess to the traditional servicing of loans. Examples include ATM fees, applying new service fees on checking and savings accounts, and trust management services. In the late 1990s a series of bank industry restructuring, including a repeal of the Glass-Steagall Act, allowing banks to invest in riskier assets and, most notably, provide investment banking and wealth management services. Some of the larger banks that historically operated solely as retail banks are increasingly earnings larger portions of operating earnings from investment banking divisions.
Banks can increase growth via external measures such as by opening new branches and expanding into new markets. Another common method involves acquiring other banks in order to gain market share, which also results in higher revenues. The most innovative banks are the ones that turn new regulatory requirements into opportunities to increase revenues by passing regulatory costs plus associated fees onto customers. For example, the Office of the Comptroller of Currency issued regulations during the 1990s requiring retail banks to increase their fiduciary duties with respect to closely held assets held in trust accounts they managed. Banks saw this as an opportunity to create new closely-held asset management groups, which have been profit centers ever since.