Aided by stellar credit quality and strong loan growth, the nation's 65 largest banks generally improved profitability in the second quarter, according to American Banker's latest quarterly survey.

"What we're seeing is modest to moderate improvements in revenues, very good expense control, and very low credit costs," said analyst Thomas F. Theurkauf Jr., with Keefe, Bruyette & Woods Inc. "What that adds up to is very high levels of profitability."

The mean return on assets for all 65 banks in the survey rose to 1.22%, from 1.12% a year earlier, as return on equity jumped from 15.05% to 16.24%.

The mean nonperforming assets ratio dropped from 1.01% to 0.70%. "The industry has gotten an A-plus grade for credit quality over the past year or so," said Lehman Brothers analyst Michael L. Mayo. "It's not staying there. But I don't see it going below an A- grade or even a B-plus over the next year."

Other analysts agreed credit quality will likely deteriorate, but slowly. "The improvement in most of the ratios has troughed," said PaineWebber's Thomas D. McCandless, who predicted that the first quarter will represent the high water mark of bank credit quality during this economic cycle.

Robust loan growth in most regions of the country provided another boost to earnings, helping banks overcome declining net interest margins caused by rising deposit costs. The phenomenon provided particularly sharp relief for Comerica Inc., Detroit; CoreStates Financial Corp., Philadelphia; and Cincinnati-based Fifth Third Bancorp.

"Margins have not fallen off the edge, as many expected late last year, and loan growth is favorable. That, combined with good efficiency levels, contributes to favorable performance ratios," Mr. Mayo said.

The Lehman Brothers analyst also predicted the trends to continue into the third quarter. Efficiency ratios should improve as lower deposit insurance payments translate into reduced noninterest expense, he said.

Earlier this month, the Federal Deposit Insurance Corp. announced plans to cut the rate most banks pay for deposit insurance from 23 cents to 4 cents per every $100 of domestic deposits. The move is expected to save the industry $4.4 billion in annual expenses.

Despite the current acquisition frenzy sweeping the industry, the American Banker survey reinforces views of skeptics who have long argued that big is not necessarily better.

Comparing second-quarter 1995 performance with previous years shows profitability at the very largest banks - those with assets over $70 billion - continues to lag behind those with $20 billion to $70 billion of assets, and large regionals ($10 billion to $20 billion).

The mean ROA for megabanks fell to 0.99% in the second quarter from 1.09% a year earlier and 1.12% in the 1993 quarter. Superregionals, on the other hand, improved from 1.19% to 1.20% during the three-year period, while large regionals jumped to 1.25% from 1.10%.

Analysts blamed the decline on weak trading revenues at some of the money center banks, as well as an overall reluctance to cut expenses.

"As a general rule, the larger the company the less discipline they have had for getting their costs lower," Mr. McCandless said. "The expenses are still a factor for a lot of the big banks - they're just not under control - and the revenue growth has been muted."

Among the megabanks, Chemical Banking Corp. and Citicorp showed the greatest improvement in profitability ratios while Bankers Trust Corp. and Chase Manhattan Corp. reported the steepest declines, according to the study. All four banks are based in New York.

Market-to-book rankings in the study were influenced, as might be expected, by recent acquisitions and acquisition-related speculation. Some of the most dramatic gains came from Shawmut National Corp., which agreed earlier this year to be acquired by Fleet Financial Group, and First Fidelity Bancorp, which agreed to be bought by First Union Corp. in June.

Shawmut National's market valuation jumped from 138% of book to 177% from the year-ago quarter, while First Fidelity soared from 147% to 171%.

Another big jump was recorded by BayBanks Inc., considered one of the prime acquisition targets left in the Northeast. BayBanks' valuation went from 153% of book to 180% during the period.

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