Some naysayers contend it may not last for long, but the banking industry's rebound proceeded at full speed in the second quarter.
In perhaps the most promising sign, problem loans clearly leveled off at the nation's largest banking companies.
Nineteen of the top 25 experienced a decline in the ratio of nonperforming assets to total assets, according to a survey by the American Banker.
For the group, the ratio fell to 2.69% from 2.80% at the end of the first quarter. (See table on page 7.)
And a survey of 130 bank companies by Keefe, Bruyette & Woods Inc. found that the ratio of nonperforming assets fell for the first time in more than two years, to 3.06% from 3.14% in the first quarter.
What's more, net interest margins - already high by historical standards - continued to widen. At the top 25, the margins grew to 4.22%, from 4.14% in the first quarter. The highest: 6.53% by Banc One Corp.
The Keefe survey showed that margins jumped to 4.67%, up from 4.57% in the first quarter and 4.46% a year earlier.
The fatter margins, combined with smaller loan-loss provisions due to improving credit quality, led to a dramatic surge in earnings. The top 25 posted a 50% increase, to $3.3 billion, from the recession-depressed levels of a year earlier.
"There's little question that this industry is on the road to recovery," said James McDermott, president of Keefe.
Still, some experts found reasons to temper growing optimism about the future.
In particular, the outlook for revenue growth from traditional banking business remains uncertain. And most believe that net interest margins are at - or past - their peak and cannot be sustained for long.
"This industry is going to focus on cost containment and nonlending revenue for some time to come," said Lawrence Cohn, an analyst at PaineWebber Inc.
Payoff from Expense Cuts
Cost cutting clearly had a positive effect in the second quarter. Noninterest expenses at many banks fell, paced by declines in head count.
Efficiency ratios - measuring how much every dollar of revenue is chewed up by operating costs - dropped to 65.3% from 66.8% in the first, according to Keefe.
Some of the savings are merger related. Chemical Banking Corp. reported that it cut operating expenses by $65 million in the quarter as a result of its merger with Manufacturers Hanover Corp.
A large part of that came from layoffs. Nearly 2,000 people left the bank's payroll in the second quarter.
But other banks have simply cut back. At Citicorp, noninterest operating expense dropped to $2.46 billion from $2.55 billion a year earlier. Salaries and staff benefits accounted for $68 million of the change.
On the asset-quality front, even when nonperforming asset ratios increased, the amount was relatively small.
Chemical's ratio, for example, inched up to 4.61% from 4.58%, while Chase's rose to 5.63% from 5.50%.
One exception: Wells Fargo & Co., whose nonperforming level jumped to 5.67% from 4.77%.
(Citicorp, the largest and most closely watched banking company, has not yet released enough information to calculate its nonperforming assets ratio.)
Fallout from a War
The chaos in the former republic of Yugoslavia accounted for part of the increase in bad loans at Chemical and Chase.
Chemical had to put $257 million in loans to the former republic on nonperforming status, while Chase had to add $153 million to its nonaccrual outstandings.
Several battered New England banks turned in respectable results, suggesting that their asset quality problems have been stemmed. Bank of Boston Corp.'s results were particularly cheering, showing a decline in nonperforming assets to 4.25% of total assets, down from 5.04% in the first quarter.
Investors reacted perversely to the industry's strong performance. Bank stocks traded down quickly when any bank reported even mildly disappointing results, and banks with income well ahead of analysts, expectations saw little or no follow-through in their stock prices.
What's next? Belt-tightening will probably continue, and banks will likely keep up the search for new sources of revenue.
"The momentum, such as it is, will come from the expense side and from lower loan-loss provisions" as banks make some headway with their problem loans, according to Diane Glossman, an analyst at Salomon Brothers Inc..
Many big banks are also stepping up their activities in the derivatives markets, and others are aggressively peddling mutual funds and other fee-based products and services.