The average net interest margin for the top 25 bank holding companies hit its lowest point since March 1992 despite strong profits, a survey of third-quarter results compiled by the American Banker shows.
Based on data supplied by SNL Securities, Charlottesville, Va., the survey found the nation's largest banks as a group had an average net interest margin of 4.16% at the end of the third quarter, compared to 4.25% at the same time last year.
That nine basis point drop was the lowest level in more than two years. At the end of the first quarter 1992, average net interest margin for the group hit a low of 4.12%.
Meanwhile, total earnings for the top 25 posted a record group high for the 1990s. Net income for the big banks totaled $6.07 billion for the quarter, compared to $5.7 billion for the same quarter last year, and $6.04 billion for the second quarter of 1994.
The fact that earnings were up while margins were down was not a surprise to many bank analysts, who have been witnessing something of an investor panic about bank stocks. Those who follow banks say with interest rates rising, banks already have begun paying higher deposit rates or will begin to soon.
Meanwhile, although commercial lending at the nation's largest banks finally took a turn for the better in the quarter, the increased volume came at a price. Banks across the country, particularly large regional institutions, have been reporting intense competition in lending, slicing profit margins on loans ever thinner.
"Banks have been more aggressive in making and marketing loans. That's reflected itself in loan pricing," says Raphael Soifer, a banking analyst with Brown Brothers Harriman. "This aggressive marketing is paying off. The economy is growing so the market wants more loans."
But greater deposits are needed to fund those loans, and "bank deposit rates have lagged money market rates remarkably," said Tom Humphries, director of research at Shadwell Partners, a Charlottesville, Va.-based money management firm that specializes in financial stocks.
Mr. Humphries said the gap between bank deposit rates and money market rates will contract soon, driving down net interest margins even further. "The earnings that we're seeing now and what we've seen over the past few quarters are as good as we're going to see. Profitability seems as if it has peaked," he said.
Behind the good earnings news lurks another sobering factor. Some analysts say profits are being driven by historically low loan loss provisions, which will not be sustainable, given the increase in lending.
"The most important reason that profits are up from a year ago is that loan loss provisions are continuing to decline," says Mr. Soifer. "They are already running at what we consider unsustainable for a much longer period. It's below average for the cycle.
"We think loan loss provisions are going to come up again. Possibly not until 1996, but a couple of years from now we'll look at these levels and see them as low."
Regional banks, in particular, are running down their loan loss provisions. Los Angeles-based First Interstate Bancorp, for example, reported a zero loan loss provision at Sept. 30. And some banks have even posted net recoveries in Other Real Estate Owned, or OREO, rather than expenses.
However, efficiency ratios across the banking industry have dropped as well, contributing to higher earnings. And those changes are likely to be permanent, not cyclical.
"Cost control has remained very firm," says Ronald I. Mandle of Sanford C. Bernstein & Co. "Fleet [Financial Group] and First Interstate announced their programs early in the year. Chase [Manhattan Corp.] just announced its own. Chemical [Banking Corp.] is about to talk about new efficiency gains at its upcoming investors meeting in early December."
And though many banks saw their earnings for the quarter fall from last year's numbers because of trading losses, the third quarter turned out to be easier on balance sheets than the quarter ended June 30.
Said Mr. Soifer: "Compared with the second quarter, trading profits are up. They are down from a year ago, sharply in some cases, but still up from a year ago."
The New York money center banks got hit particularly hard by market losses. Earnings at Bankers Trust New York Corp. were down 46% from the previous year's third quarter, and J.P. Morgan & Co. saw net income drop 30% from Sept. 30 1993, both largely due to trading set-backs.
Rising interest rates also caught some banks unprepared. Liability-sensitive balance sheets at Banc One Corp., Columbus, and PNC Bank Corp., Pittsburgh, accounted for earnings drops. While Norwest Corp., Minneapolis, and First Interstate hustled to take advantage of the interest rate changes.
"Higher yielding loans replaced lower yielding securities" at both banks, said Sandra Flannigan of Merrill Lynch & Co. "Norwest had been selling nearly $2 billion in investment securities during the quarter and invested them at a higher rate."
[Tabular Data Omitted]
