Trading Lifts Big Banks, Some Credit Problems Linger

Big banks reporting first-quarter results Tuesday-led by Chase Manhattan Corp. and Citicorp-relied heavily on trading gains and fee income to meet or exceed expectations.

But credit card chargeoffs and revenue deficiencies still concerned Wall Street observers.

"You are seeing companies that are really stretching to make their earnings targets," said PaineWebber Inc. analyst Lawrence Cohn.

"Securities gains were exceptionally strong," Mr. Cohn said. "But core business earnings were relatively weak. If you really look at the numbers, there is not a lot of comfort."

Strength in corporate banking offset continuing losses in the two biggest banking companies' credit card businesses. Chase reported quarterly net income of $927 million, a turnaround from last year's loss of $89 million, which was merger-related.

Citicorp, No. 2 in assets, outearned Chase at $995 million, up 9%.

Wells Fargo & Co. posted a 28% earnings increase, to $339 million. But its $3.62 a share was 15 cents short of analysts' estimates. The company blamed slow revenue growth.

Profits at Banc One Corp. were up 7% to $371 million, bolstered by investment management, insurance, and investment banking, while PNC Bank Corp. of Pittsburgh reported a 12% jump to $266.3 million, fueled mostly by fees. Mellon Bank Corp., also of Pittsburgh, was up 8% to $182 million aided by trust and asset management fees.

"You have a much more stable revenue source on the fee side, and less swings from the interest side," said Frank Barkocy, an analyst with Josephthal Lyon & Ross. That will be important as banks try to adjust to a rising interest rate environment, he said.

Chase Manhattan Corp.

Income from operations rose 9% to $946 million, while per share net earnings of $1.97 beat consensus estimates by 3 cents.

"First quarter earnings reflect the benefits of Chase's balanced business portfolio," said Walter V. Shipley, chairman. "While revenue growth in the quarter was lower than our 1997 target, financial performance continues to be strong."

Analysts credited the results to huge gains in trading and investment securities. The $340 billion-asset Chase said trading revenues rose to $586 million, including $173 million of related interest income. The numbers reflect higher results in foreign exchange, derivatives, and investment securities.

Fees from trust, custody, and investment management rose 8% to $310 million as assets under management increased. Revenues from loan syndication and corporate finance fell 25% to $168 million.

Consumer banking revenues rose 6%, but were hurt by higher losses in credit cards, the New York bank said. Net card chargeoffs reached 5.66% of outstandings, a percentage point up from a year earlier. Delinquencies rose to $622 million from $495 million.

A bright spot in Chase's consumer business was mortgage banking, analysts said. Its revenues increased 13% to $46 million, while those from deposits and midsize corporate banking rose 15% to $131 million.

Chase slashed expenses to $2.4 billion from $4.1 billion in the 1996 first quarter, the result of post-merger consolidation.

While earnings were in line with expectations, some market watchers said Chase's strong trading results masked weaknesses at the company.

Citicorp

Earnings per share of $2.01 beat consensus estimates by 2 cents. Chairman John S. Reed called the first-quarter results "on track."

The New York-based company said results were bolstered by strong corporate banking earnings, up 39% to $650 million. More than two-thirds of that figure came from emerging markets, the remainder from global relationship banking.

The bank also "had boffo trading results," according to David S. Berry, head of equity research at Keefe, Bruyette & Woods. But the consumer business was weakened by credit card problems.

Consumer banking revenues rose 4% to $1.46 billion, but net income from the sector fell 3% to $490 million as card earnings dropped 14%.

Net credit card chargeoffs were 5.91% of receivables, well above the 4.38% last year. Delinquencies rose to $884 million from $759 million.

Operating expenses rose 11% to $3.17 billion. Analysts said the increase reflected efforts to open new branches and reengineer emerging markets operations.

Wells Fargo & Co.

Disappointing revenues brought earnings per share of $3.62 far short of the consensus $3.77 expectation.

The San Francisco company's first quarter was affected by its $13.2 billion merger with First Interstate Bancorp, completed on April 1, 1996.

As a result, Wall Street is examining how quickly the $101 billion-asset Wells can slash expenses and restore revenue growth. During the first quarter the company made significant headway on costs but still has not met top-line hopes.

"The problem is the R-word," revenues, said Thomas Theurkauf, an analyst with Keefe, Bruyette & Woods. "This shows it's darn near impossible to simultaneously undertake a huge consolidation without risking a loss of revenues. It's not a permanent problem, it is an intermediate problem."

Net interest income reached $1.2 billion in the quarter, up from last year but short of company projections. Similarly, fee income, $640 million in the first quarter, rose 81% year-to-year but was shy of expectations.

"Management said total revenues should crop up this quarter and then grow at a 5% annualized rate. But they were a little bit light this quarter," said Carole Berger of Salomon Brothers.

Balance sheet shrinkage is not helping revenues.Loans as of March totaled $65.4 million, down from $67.4 million at yearend. Before the First Interstate combination, loans totaled $35.2 billion.

On the upside, Wells has hit the halfway mark toward expense reduction targets, said analysts. Some $400 million in gross annual expense savings have been realized since the merger.

"This was a very massive integration of two companies with very different strategic plans," said Ms. Berger. "It will take some time for that stability to be reestablished. It is sort of a guess as to when that is."

Banc One Corp.

The Columbus, Ohio, superregional, with $101.6 billion of assets, posted earnings per share of 86 cents, beating consensus estimates by 2 cents.

Noninterest income grew 16.5%, while loan growth contributed to a 7.5% increase in net interest income, to $1.3 billion.

Expenses were up 5% as Banc One continued to focus on a major internal restructuring, expected to be completed by yearend.

The 10th-largest credit card issuer, soon to climb higher with its pending acquisition of First USA Inc., Banc One said its provision for credit losses rose 45%, to $235 million. That was 4% lower than in the fourth quarter.

Net chargeoffs of $212 million were similarly 37% higher than a year earlier, but 8% lower than in the fourth quarter.

Profitability ratios improved: return on assets by five basis points, to 1.5%, and return on equity by 182 basis points, to 18.2%.

PNC Bank Corp.

Analysts' per-share estimate of 79 cents was bettered by a penny, while fee income grew 32%. Noninterest income was bolstered by asset management and trust, mutual fund servicing, and credit card and merchant services. Net interest income rose 4% over a year earlier.

The $71.2 billion-asset company had higher expenses, which it attributed to marketing expenses associated with its American Automobile Association credit card, and higher incentive compensation.

CoreStates Financial Corp.

Earnings per share at Philadelphia-based CoreStates, 94 cents, fell 2 cents shy of the consensus projection. The $45 billion-asset bank earned $198 million, up 12% from a year earlier. Excluding one-time charges last year for restructuring and merger expenses, income rose 4%.

Net interest income was essentially flat, with 4.4% growth in average loans offset by a decline of four basis points in the net interest margin. CoreStates said it had essentially no loan growth this year until March, when average loans increased by $300 million.

Expenses declined 2.5% to $392 million, primarily because of reductions associated with the April 1996 acquisition of Meridian Bancorp.

Revenues from four fee-based businesses rose 5% over the year-earlier quarter, led by 14% growth in international service fees and strong growth in asset management and trust fees. Offsetting that strength, service charges on deposit accounts, was down slightly.

Mellon Bank Corp.

The $1.38 a share beat analysts' estimates by a penny. The $42 billion- asset Mellon, which derives 60% of its revenues from fee businesses, said fee revenues rose 7%, with big gains in trust and investment management, especially institutional trust and private asset management. Operating expenses were up 4% to $582 million and were related to acquisitions last year.

Comerica Inc.

The $35 billion-asset, Detroit-based company boosted income 6% to $124 million thanks to cost-cutting and modest revenue growth.

Revenues were affected by the sale of operations including a custom brokerage business and Illinois bank subsidiary. Comerica also realized a gain of $17 million on the sale of its bond indenture business.

Excluding extraordinary gains, fee income rose 4%. Net interest income was up slightly as a result of loan growth and a better net interest margin. Interest expense declined 10% to $275.5 million.

Expense control played a big part in earnings momentum at many banks, said Mr. Barkocy at Josephthal Lyon & Ross. Despite the selloff of bank stocks in recent weeks, Mr. Barkocy said he believes investors will be drawn back by strong fundamental earnings growth. "In relation to other industry sectors, banks will perform quite well," he said. +++

Wells Fargo & Co. San Francisco Dollar amounts in millions (except per share) First Quarter 1Q97 1Q96 Net income $339.0 $264.0 Per share 3.62 5.39 ROA 1.31% 2.16% ROE 10.02% 28.34% Net interest margin 6.14% 6.18% Net interest income 1,216.0 676.0 Noninterest income 640.0 354.0 Noninterest expense 1,117.0 567.0 Loss provision 105.0 - Net chargeoffs 201.0 113.0 Balance Sheet 3/31/97 3/31/96 Assets $101,863.0 $48,978.0 Deposits 76,427.0 37,806.0 Loans 65,436.0 35,167.0 Reserve/nonp. loans 293.4% 313.0% Nonperf. loans/loans 1.00% 1.50% Nonperf. assets/assets 0.90% 1.50% Nonperf. assets/loans + OREO 1.30% 2.10% Leverage cap. ratio 6.60% 7.9% Tier 1 cap. ratio 7.75% 9.40% Tier 1+2 cap. ratio 12.00% 13.04%

PNC Bank Corp. Pittsburgh Dollar amounts in millions (except per share) First Quarter 1Q97 1Q96 Net income $266.3 $238.3 Per share 0.80 0.69 ROA 1.54% 1.34% ROE 19.48% 16.65% Net interest margin 3.98% 3.73% Net interest income 637.3 616.1 Noninterest income 425.1 321.6 Noninterest expense 636.2 565.6 Loss provision 10.0 - Net chargeoffs 61.0 34.0 Balance Sheet 3/31/97 3/31/96 Assets $71,166.0 $72,668.0 Deposits 44,902.0 45,621.0 Loans 52,575.0 48,800.0 Reserve/nonp. loans 346.11% 328.88% Nonperf. loans/loans 0.61% 0.76% Nonperf. assets/assets 0.60% 0.74% Nonperf. assets/loans + OREO 0.83% 1.10% Leverage cap. ratio 7.17% 6.90% Tier 1 cap. ratio 7.70%* 8.18% Tier 1+2 cap. ratio 11.10%* 11.70%

*Estimated Mellon Bank Corp. Pittsburgh

Dollar amounts in millions (except per share) First Quarter 1Q97 1Q96 Net income $191.0 $179.0 Per share 1.38 1.24 ROA 1.83% 1.76% ROE 21.20% 19.70% Net interest margin 4.37% 4.35% Net interest income 373.0 366.0 Noninterest income 536.0 504.0 Noninterest expense 582.0 560.0 Loss provision 80.0 25.0 Net chargeoffs 36.0 28.0 Balance Sheet 3/31/97 3/31/96 Assets $42,068.0 $41,582.0 Deposits 29,936.0 29,898.0 Loans 27,007.0 26,389.0 Reserve/nonp. loans 545% 265% Nonperf. loans/loans 0.35% 0.66% Nonperf. assets/assets 0.40% 0.60% Nonperf. assets/loans + OREO 0.62% 0.93% Leverage cap. ratio 8.70% 7.52% Tier 1 cap. ratio 8.70% 7.69% Tier 1+2 cap. ratio 13.70% 12.20% CoreStates Financial Corp. Philadelphia Dollar amounts in millions (except per share) First Quarter 1Q97 1Q96 Net income $198.1 $177.1 Per share 0.94 0.81 ROA 1.82% 1.63% ROE 21.89% 18.13% Net interest margin 5.47% 5.51% Net interest income 741.1 740.1 Noninterest income 214.0 209.4 Noninterest expense 393.9 416.2 Loss provision 43.0 38.8 Net chargeoffs 49.3 43.2 Balance Sheet 3/31/97 3/31/96 Assets $45,100.0 $43,900.0 Deposits 33,100.0 32,600.0 Loans 33,600.0 32,000.0 Reserve/nonp. loans 301% 269% Nonperf. loans/loans NA NA Nonperf. assets/assets 0.57% 0.64% Nonperf. assets/loans + OREO 0.77% 0.88% Leverage cap. ratio 9.00% 8.30% Tier 1 cap. ratio 9.72% 9.40% Tier 1+2 cap. ratio 13.55% 12.86% Comerica Inc. Detroit Dollar amounts in millions (except per share) First Quarter 1Q97 1Q96 Net income $124.0 $117.0 Per share 1.10 0.98 ROA 1.46% 1.33% ROE 20.41% 17.27% Net interest margin 4.59% 4.38% Net interest income 352.0 349.0 Noninterest income 129.0 137.0 Noninterest expense 249.0 279.0 Loss provision 41.0 29.0 Net chargeoffs 17.0 23.0 Balance Sheet 3/31/97 3/31/96 Assets $34,868.0 $35,023.0 Deposits 22,148.0 22,911.0 Loans 27,050.0 25,549.0 Reserve/nonp. loans 563.76% 246.66% Nonperf. loans/loans 0.26% 0.57% Nonperf. assets/assets 0.28% 0.52% Nonperf. assets/loans + OREO 0.36% 0.71% Leverage cap. ratio 6.98% 6.99% Tier 1 cap. ratio 6.90% 7.62% Tier 1+2 cap. ratio 10.64% 11.13% Citicorp New York Dollar amounts in millions (except per share) First Quarter 1Q97 1Q96 Net income $995.0 $914.0 Per share 2.01 1.75 ROA 1.41% 1.37% ROE 20.80% 20.20% Net interest margin 5.23% 5.15% Net interest income 3,449.0 3,263.0 Noninterest income 2,392.0 2,143.0 Noninterest expense 3,169.0 2,860.0 Loss provision 423.0 494.0 Net chargeoffs 398.0 444.0 Balance Sheet 3/31/97 3/31/96 Assets $290,354.0 $263,566.0 Deposits 188,848.0 172,004.0 Loans 172,471.0 165,451.0 Reserve/nonp. loans 189.20% 126.90% Nonperf. loans/loans 1.80% 2.60% Nonperf. assets/assets 1.50% 2.10% Nonperf. assets/loans + OREO 2.40% 3.30% Leverage cap. ratio NA NA Tier 1 cap. ratio 8.40%* 8.40% Tier 1+2 cap. ratio 12.10%* 12.40%

*Estimated Chase Manhattan Corp. New York Dollar amounts in millions (except per share) First Quarter 1Q97 1Q96 Net income $927.0 ($89.0) Per share 1.97 (0.32) ROA 1.11% - ROE 19.12% - Net interest margin NA 3.43% Net interest income 2,051.0 2,150.0 Noninterest income NA 1,869.0 Noninterest expense 2,447.0 4,093.0 Loss provision 220.0 245.0 Net chargeoffs 422.0 315.0 Balance Sheet 3/31/97 3/31/96 Assets $340,338.0 $301,984.0 Deposits 176,030.0 168,934.0 Loans 152,332.0 145,648.0 Reserve/nonp. loans NA NA Nonperf. loans/loans NA NA Nonperf. assets/assets NA NA Nonperf. assets/loans + OREO NA NA Leverage cap. ratio 6.90%* 6.40% Tier 1 cap. ratio 8.40%* 7.90% Tier 1+2 cap. ratio 12.10%* 12.00%

* Estimated Banc One Corp. Columbus, Ohio Dollar amounts in millions (except per share) First Quarter 1Q97 1Q96 Net income $370.7 $345.9 Per share 0.86 0.77 ROA 1.50% 1.45% ROE 18.20% 16.38% Net interest margin 5.76% 5.59% Net interest income 1,284.6 1,195.0 Noninterest income 585.4 502.6 Noninterest expense 1,068.9 1,019.1 Loss provision 235.0 162.4 Net chargeoffs 212.0 154.7 Balance Sheet 3/31/97 3/31/96 Assets $101,587.9 $95,708.2 Deposits 72,168.2 70,217.0 Loans 74,056.7 68,460.0 Reserve/nonp. loans 293.4% 245.5% Nonperf. loans/loans 0.51% 0.60% Nonperf. assets/assets 0.43% 0.51% Nonperf. assets/loans + OREO 0.43% 0.51% Leverage cap. ratio 7.90%* 8.24% Tier 1 cap. ratio 8.77%* 9.57% Tier 1+2 cap. ratio 12.86%* 13.44%

*Estimated ===

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