"Banks had to scratch and claw their way to meet their goals" in 2006, said Sherief Meleis, managing director at bank consulting firm Novantas. "Next year is going to be just as crazy."
Analysts expect banks' earnings to weaken further. To offset some of the losses, they expect more takeovers, but not necessarily banks buying banks. Instead, banks and other financial service providers are likely to combine.
So look for more deals in 2007 like those of this year, when Charlotte-based Bank of America Corp. bought credit card leader MBNA and cross-town rival Wachovia Corp. absorbed adjustable-rate mortgage lender Golden West Financial Corp.
And they'll take place in a difficult revenue atmosphere. Jim Reichbach, national leader of Deloitte & Touche USA's banking and finance industry practice, predicts '07 will be "a tough year for the banks and their margins."
Gary Townsend, an equity analyst at Friedman, Billings, Ramsey & Co., said those banking companies that can show earnings-per-share growth will still struggle in the current interest rate environment.
"It doesn't really pay to borrow on this level," Townsend said. "It's a difficult, competitive market."
The Federal Reserve continued raising interest rates through the first half of 2006, trying to stanch inflation, but halted its campaign during the summer as the concern began to shift from rising prices to an economic slowdown.
Many banks are betting that the Fed will cut short-term rates in 2007, according to a report by Bear Stearns.
That would help a lot since banks' earnings are tied closely to those rates. Banks flip short-term borrowings into long-term loans and profit from the discrepancy in long- and short-term rates. When the Fed raises short-term rates, the higher cost of borrowing money squeezes banks' profits.
If rates continue to rise, customers could feel pinched as banks raise or implement new fees to offset costs.
"Consumers should watch out for that," Townsend said. "It's part of a bank's value proposition. If a customer doesn't like what they get, they will move on."
Meanwhile, industry watchers say customers can expect more consolidation between banks and companies that offer such single financial services like insurance and mortgages, so-called "monolines."
Besides the Bank of America-MBNA and Wachovia-Golden West deals, there was the March agreement by credit card issuer Capital One Financial Corp. to buy New York-based regional bank North Fork Bancorp. That followed Capital One's 2005 acquisition of its first traditional bank, Hibernia Corp.
And in November, brokerage and financial services firm Charles Schwab Corp. sold its wealth management subsidiary U.S. Trust to Bank of America.
"If you think about five years ago, monolines were the way to go," Meleis said. "Not anymore, that is, if you want to reach more customers."
The Wachovia purchase of Golden West was one of the year's more intriguing purchases of a monoline business. Wall Street reacted negatively to the bank's purchase of a business so dependent on the declining mortgage finance business.
On the day the merger was announced, Wachovia shares fell nearly 7 percent, and several analysts downgraded Wachovia's stock. While some uneasiness has subsided, Wachovia's share price has yet to fully recover.
But Bob McGee, Wachovia's chief operating officer, said the bank's primary motivation for the purchase was the opportunity to significantly expand its Western presence. The nation's No. 4 bank based on deposits picked up additional branches in California and Texas, and its first banking centers in Arizona, Colorado, Illinois, Kansas and Nevada.
"We certainly didn't do the deal because we thought the next 18 months were going to be great for the mortgage industry," said McGee, who's heading up the Golden West integration. "We saw it as a great opportunity to grow our company with a company that has done a good job of having a good set of products that are managed in a very good way."
Mike Fratantoni, senior economist for the Mortgage Bankers Association in Washington, D.C., agrees that the mortgage business will continue this year's decline in 2007. He predicts mortgage originations totaling about $2.1 trillion in 2007, down from a projected $2.45 trillion this year and a hefty $3 trillion in 2005.
The biggest decline has been in mortgage refinancings, which are expected to total $800 billion in 2007, down by nearly half from 2005's $1.5 trillion, he said. This year they should be around $1.07 trillion.
Fratantoni said interest rates that currently average around 6 percent for a 30-year, fixed-rate mortgage will climb to 6.5 percent by the end of 2007.
"The picture is a very painful couple of years for home builders," Fratantoni said. "For Realtors, it's just sort of an uncomfortable time."