US Banking Giants Solidify Dominance Amid Industry Shifts

The first nine months of 2024 marked a significant milestone for the US banking industry, with the four largest banks — JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo — capturing 44% of the sector’s total profits. This achievement, totalling $88 billion in earnings, represents the highest market share for these institutions since 2015. When combined with the next three largest banks by deposits — US Bank, PNC, and Truist — the top seven accounted for nearly 56% of total industry profits, up from 48% in the same period in 2023.

This increasing concentration of profits underscores the advantages of scale. Larger banks are better equipped to absorb rising regulatory, technological, and operational costs while maintaining profitability. They also benefit from national brand recognition, an increasingly important factor in a post-COVID era marked by geographic mobility and digital banking adoption.

The US banking system, historically fragmented due to delayed consolidation from interstate banking restrictions, now faces renewed calls for mergers among smaller banks. However, despite these pressures, dealmaking activity remains subdued, suggesting that the industry's structural evolution may be slow but inevitable.

Non-Bank Financial Institutions: The Silent Disruptors

While the biggest banks continue to consolidate their market dominance, non-bank financial institutions (NBFIs) have emerged as formidable competitors. Entities like Apollo, Affirm, and Rocket Mortgage now provide services traditionally dominated by banks, from corporate lending to mortgages and consumer credit.

In the mortgage sector alone, non-bank companies manage over half of US home loans, a dramatic increase from just 11% in 2011. Their growing influence highlights a structural shift in the financial ecosystem. According to recent data, the NBFI sector now represents nearly half (49.1%) of total global financial assets, having grown at an impressive 8.5% in 2023 compared to the banking sector’s 3.3%.

This growth comes with risks. While NBFIs help distribute financial activity across less-leveraged entities, their lighter regulatory burden and reliance on bank funding introduce systemic vulnerabilities, particularly in volatile markets. Jamie Dimon, CEO of JPMorgan Chase, recently highlighted tech giants like Apple as emerging players in the financial space, acting “effectively” as banks without the accompanying regulatory scrutiny.

MY ANALYSIS: Navigating the Future of US Banking

The consolidation of profits among the largest US banks reflects their ability to capitalise on economies of scale and brand strength. Their dominance is unsurprising given their capacity to invest in technology, streamline operations, and weather economic turbulence better than smaller competitors. However, this trend raises critical questions about the implications for competition, innovation, and financial system resilience.

From my perspective, the rapid rise of NBFIs presents both a threat and an opportunity for traditional banks. On one hand, these entities are encroaching on profitable segments like consumer lending and mortgages, forcing banks to adapt. On the other hand, banks can collaborate with NBFIs by providing funding or forming strategic partnerships, thus maintaining indirect participation in their growth.

I anticipate further consolidation among regional and smaller banks as they seek to remain competitive in a challenging environment. A more permissive regulatory stance under a future administration could accelerate this trend, reshaping the banking landscape.

However, systemic risks from NBFIs cannot be ignored. Their reliance on bank funding and lighter regulatory oversight make them vulnerable during economic downturns, potentially creating ripple effects across the broader financial system.

The future success of large banks will depend on their ability to innovate while maintaining robust capital positions. Embracing fintech partnerships, diversifying revenue streams, and leveraging their scale to address both regulatory and competitive challenges will be critical. In an evolving landscape, adaptability will be as crucial as size in defining the winners of the next decade in finance.

Closing Thought

The financial industry is at an inflection point. The dominance of US banking giants signals the enduring value of scale, yet the rising influence of non-traditional players like NBFIs challenges the status quo. For investors and stakeholders, the question remains: can the incumbents adapt quickly enough to maintain their lead in an increasingly fragmented and competitive market? The answer will shape not only the future of banking but the stability of the global financial system itself.