Improved credit quality helped the nation's 25 largest banking companies achieve the highest quarterly earnings in recent years, as top banks in the second quarter surpassed the record set in the first quarter, a survey by the American Banker shows.
Net income at June 30 reached $6.0 billion, up 7.7% from the first-quarter total of $5.6 billion and up 21.3% from the second-quarter 1993 total of $5.0 billion.
Over the second quarter, 15 of the top 25 reduced their provisions for loan losses, while three others took no provisions.
For the group, the secondquarter provision for loan losses totaled $3.0 billion, down $91.4 million from the first quarter and down $895.7 million from the comparable quarter of 1993.
Nonperforming Assets Drop
In addition, 22 of the top 25 reduced their nonperforming assets during the second quarter. Nonperforming assets totaled $25.9 billion on June 30, down $4.1 billion from March 31 and down $16.2 billion from June 30, 1993.
The group's ratio of nonperformers to total assets fell to 1.24% on June 30, down from 1.46% on March 31 and 2.35% a year earlier
The improved credit quality helped the group maintain net interest margins in a rising interest rate environment, with 13 of the top 25 boosting their margins from the first quarter.
As a group, the average net interest margin of 4.17% was unchanged from the first quarter of 1994, after declining 30 basis points over the previous five quarters.
Morgan's Margin Gain
The bank that showed the greatest margin improvement was J.P. Morgan, with a 44-basis-point increase from 1.26% in the first quarter to 1.70% in the second quarter.
The bank with the largest decline in its margin was Bane One Corp., with a 63-basis-point decline from 6.14% to 5.51%.
The improvement in Morgan's margin was attributable to a 36% rise in net interest revenue from $397 million for the first quarter to $540 million for the second quarter.
"The firm received $35 million from past-due interest claims on Brazilian assets, and also recorded $50 million of interest revenues associated with income tax refunds," Morgan said.
These two items accounted for almost 60% of the growth in net interest revenue over the quarter.
Reasons for Decline
Bane One said the sharp decline in its margin was attributable to a one-time gain in the first-quarter margin, "the impact of increasingly competitive loan pricing," and the bank's "liability-sensitive position in a rising short-term interest rate environment."
The nation's largest banking company, $254 billion-asset Citicorp, posted the biggest increases in earnings. The bank's second-quarter net income of $877 million was 59% higher than first-quarter earnings and 97% higher than earnings for the comparable quarter of 1993.
In addition to improvements in core business revenues, cost controls, and better asset quality, the bank said its earnings "included recognition of $150 million of deferred tax benefits and net pretax gains of $117 million from net asset gains."
Although the group's earnings have been soaring, profitability has not. The weighted return on average assets for the top 25 was 0.78% for the second quarter, up only 3 basis points from the 0.75% posted in the first quarter of 1994 and the second quarter of 1993, but down 3 basis points from the 0.81% scored by the group in the third quarter of 1993.
Sharp earnings gains m the first half are not reflected in profitability, as measured by return on assets, due to a new accounting rule for derivatives, Financial Accounting Standards Board Interpretation No. 39. "Offsetting of Amounts Related to Certain Contracts," or FIN 39, which took effect in the first quarter of 1994.
The change has inflated the group's total assets by including on the balance sheet unrealized gains on forward, swap, option, and other conditional or exchange contracts.
In the first quarter, the rule change caused assets to rise a record 9%, to $2.06 trillion. In the second quarter, the group's total assets, helped by the new rule, rose an additional 1.4%, to $2.09 trillion on June 30.
