Bank executives and analysts are bullish about the industry's longer- term earnings prospects, despite the signs of weakness in third-quarter income statements.
The experts cited slow but steady increases in fee income, low levels of problem loans, and favorable trends in operating costs, thanks to mergers and reengineering.
"I believe earnings growth will probably slow a little bit over the next three to four years," said National City Corp. chairman David Daberko. "But I still believe the industry can grow at better than a 10% compound growth rate."
Many banks did not meet that benchmark in the third quarter, but the reasons were mostly "nonrecurring" and did not cause alarm.
As shown in the profitability tables that begin on page 6, the aggregate return on equity for 59 banking companies with more than $10 billion of assets fell in the quarter to 15.71% from 16.84%.
Much of the drop in net profitability was attributed to merger-related expenses or special charges related to recapitalizing the Savings Association Insurance Fund. The operating-income trends were positive.
"Banks are a reflection of the community they are in and the fact is that the economy is pretty good," said Roger L. Fitzsimonds, president and chief executive officer of Milwaukee-based Firstar Corp.
He also noted that while interest margins may have declined in recent years, they remain strong from a historical standpoint.
"I grew up when a 150-basis-point spread was considered wonderful, but we've still got a 300-basis-point spread between prime and Fed funds," Mr. Fitzsimonds said. "That has certainly been helpful."
Bankers also noted that after many years, a convergence of factors has turned in their favor.
"We've eliminated some of the bad competitive practices such as irrational pricing of deposits that came with the thrift crisis several years ago," said Terrence A. Larsen, chairman and chief executive officer of CoreStates Financial Corp.
Mr. Larsen added that regulatory changes have generally helped the banking industry, and "we've achieved much more of a balance between short- term necessities and long-term strategies that focus on the customer."
David Wagner, chairman and CEO of Old Kent Financial Corp., Grand Rapids, Mich., was also pleased with the direction the industry has taken.
"We've had strong growth in fee income, gotten a better mix in the balance sheet by moving assets out of investments and into loans, and loan demand has been pretty strong," he said. He predicted 1997 "will probably be another good year."
But some analysts remain convinced that even if banks are unlikely to suffer any setback in the near term, current levels of profitability cannot be sustained for an extended period.
Raphael Soifer, an analyst with Brown Brothers Harriman & Co., said the growth in commercial lending could backfire if the loans wind up being used mainly for inventory restocking. He also said there are limits to growth in fee income, while improved efficiency could, paradoxically, push bank earnings down.
"As banks become more efficient, they become better able to compete on price so spreads shrink," the analyst said. "There's only so much blood you can squeeze out of a stone and at some point the positive effect of cost reduction winds up getting competed away."
"If the economy slows," Mr. Soifer added, "it will be even harder to maintain pricing."
