Pared Expenses Helped Boost Big Banks' 1Q Net by 13%

The nation's largest banks, as a group, boosted first-quarter profits by 13%, according to an American Banker survey.

Bank stock analysts said the improvement was largely due to expense controls.

"The growth reflects more efficient operations and lower expenses," said David Hilder, an analyst at Morgan Stanley & Co.

And many market observers said they expect the profitability trend to continue through 1997.

"It's steady as she goes," said James J. McDermott Jr., president of Keefe, Bruyette & Woods Inc. "Profitability measures were quite strong, and many of the elements remained the same, even though revenue grew less than previous quarters."

The aggregate return on equity for the 55 banks in the survey-which range in asset size from $10 billion up to Chase Manhattan Corp.'s $340 billion-was 17.72% for the first quarter. That compared with 15.66% last year.

Except for MBNA Corp., a credit card specialist in a class by itself at 33.06%, First Bank System Inc., Minneapolis, had the highest return on equity among the leading holding companies. At 23.14%, it was up from 22.50% a year earlier.

Five banks in the "mega" category, including the money-center institutions, showed significant improvement in return on equity, reflecting the completion of merger-consolidations begun in late 1995, analysts said.

Chase Manhattan's return on equity was 19.12% for the first quarter, up from a negative 2.25% in the period last year, before its integration with Chemical Banking Corp.

First Union Corp., Fleet Financial Group, and First Chicago NBD Corp. also showed post-merger profitability gains.

Smaller institutions similarly benefited from consolidations and internal restructuring, analysts said.

BankBoston Corp.'s return on equity jumped to 18.02%, from 12.49% in the first quarter last year, before the completion of its merger with BayBanks Inc.

Summit Bancorp of Princeton, N.J., had return on equity of 13.35%, up from a negative 0.58% caused by one-time merger charges in the 1996 quarter.

Firstar Corp., Milwaukee, had return on equity of 18.29%, nearly doubling last year's 9.57% as the result of a restructuring program, analysts said.

Analysts pointed to a number of other elements that have boosted earnings ratios, such as share repurchase programs and the replacement of lower-yielding balance sheet assets-like Treasury bills and mortgage loan portfolios-with higher-yielding assets like small-business loans.

Declining quality of credit card loans was offset by improvement in commercial portfolios, said analysts.

Nonperforming assets as a percentage of banks' total loans dropped to 0.79% for the 55 top banks in the survey. In 1996, the ratio was 0.96% of total loans.

Some analysts sounded a note of caution.

"Banks are increasing the risk in their portfolios by switching to higher-yielding assets, but they are not adding to reserves," said Richard X. Bove, an analyst at Raymond James & Associates, St. Petersburg, Fla. "There will ultimately be a cyclical downturn in earnings because of a loan-loss problem."

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER