Fees Fueling Record Profits But Chargeoffs Also Climbing

Strong growth in noninterest income helped commercial banks achieve record earnings in the first quarter, but a surge in loan chargeoffs tainted the good news, the Federal Deposit Insurance Corp. reported Thursday.

The banking industry earned $15.9 billion in the first quarter, up 10.1%, or $1.5 billion, from the year earlier. Compared with the fourth quarter of 1997, net income at the nation's 9,024 commercial banks was up 4.1%, or $621 million.

It was the fifth consecutive record-setting quarter.

"We're finding it more and more of a challenge to come up with new superlatives to describe the continuing profits," said FDIC spokesman Phil Battey. "But we're not complaining."

Bank trade groups, too, were pleased by the quarterly earnings data.

"It's a beautiful complement to what (Federal Reserve Board Chairman Alan) Greenspan said yesterday about the overall state of the economy," said Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America. "No major clouds on the horizon."

During the 12 months ended March 31, commercial bank deposits swelled 8.6%, to $3.467 trillion. Assets increased 10.1%, to $5.111 trillion.

Net chargeoffs, however, grew in the first quarter. Chargeoffs on commercial and industrial loans totaled $583 million, soaring 83.1% from the year before. Net chargeoffs on credit card loans rose to $3 billion in the first quarter, a jump of 8.7%.

The credit card chargeoff rate hit 5.4%, the highest quarterly level in the 16 years such data have been collected. Regardless, FDIC financial analyst Ross Waldrop said credit card lending remained quite profitable and overall asset quality was "largely favorable."

For example, the proportion of banks' loans that were noncurrent-that is, 90 days or more past due-was 0.98% in the first quarter, the second- lowest rate in 17 years. A year earlier, the rate was 1.05%.

The only loan type that saw a significant increase in its noncurrent rate was the commercial and industrial category. The noncurrent rate for these loans rose to 0.96% in the first quarter, from 0.85% in the fourth quarter and down slightly from 0.97% in the first quarter of 1997. A little more than half the first-quarter increase was because of bad loans to foreign borrowers, mostly Asian, Mr. Waldrop said.

"This is a specific, direct effect of the Asian economic crisis," he added.

Robust growth in noninterest income-particularly fees from trust activities, which reflected the aging of the population as well as stock market-generated increases in wealth-helped drive the earnings gain, the FDIC said. Noninterest income grew to $29.2 billion in the first quarter, up 7.4% from the fourth quarter and 18.8% from the first quarter of 1997.

"The growth in fee income shouldn't be misconstrued as growth in fees just on consumers," said Joe Belew, president of the Consumer Bankers Association. "It's spread throughout the industry, and it's a healthy sign that banks are not too heavily dependent on lending."

Despite a seven-year low in the net interest margin, net interest income rose to $44.3 billion in the first quarter, up 5.2% from the first quarter of 1997. The net interest margin fell 16 basis points from the year earlier, to 4.06%.

Also contributing to the record bank earnings were one-time gains from the sales of securities and other assets, the FDIC said.

As for other measures of profitability, return on equity was 15.02% in the first quarter, up from 14.66% in the fourth quarter but down from 15.10% in the first quarter of 1997.

The first-quarter return on assets was largely the same: 1.26%, up slightly from 1.24% in the fourth quarter and 1.25% in the first quarter of 1997.

In another sign of the industry's health, the number of banks on the FDIC's "problem list" fell from 71 at Dec. 31 to 67 at March 31. However, assets held by problem banks edged up $200 million, to $4.8 billion.

Mergers during the first quarter absorbed 146 banks, and 27 new banks were chartered.

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