Bank analysts agree that consumer credit is not a train wreck waiting to happen. Nevertheless, if several banks encounter serious problems, stocks could be dragged down.

Analysts who met on July 1 for American Banker's quarterly roundtable session also noted that for the first time, bank stocks are no longer trading as a group. And they agreed that banks excelling at marketing will distinguish themselves.

Merger dealmaking - the trend of 1995 - has slowed in 1996, and the analysts were somewhat mixed on the causes. Some pointed to Securities and Exchange Commission restrictions limiting buybacks after mergers were accounted for as stock swaps - the preferred method among banks - while others wondered if banks were no longer interested in buying branches in the emerging age of electronic commerce.

The roundtable participants were Robert Albertson of Goldman Sachs & Co., Judah Kraushaar of Merrill Lynch & Co., Thomas Brown of Donaldson, Lufkin & Jenrette, and roundtable newcomer, Stephen Berman of Stein Roe & Farnham.

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The market capitalization data for the top 100 banks at the end of the second quarter showed the smallest increase in six quarters. Are bank stocks losing altitude?

KRAUSHAAR: There are more question marks for more companies, particularly as consumer credit costs are mounting and as increasing numbers of banks may have to play catch-up on technology spending. But there's still a number of large companies that have very strong earnings momentum and are much more disciplined than in the past, and I don't think the gain is necessarily over for those types of companies. I think the bank stock market will continue to favor larger cap companies with deep restructuring stories.

ALBERTSON: I'm struck by the differentiation in performance. We've got stocks up 25%, 30% in the bank group. We've got them down 7% to 10%. And this is the first year where clearly the group is no longer a group.

BROWN: We finally hit this point which we'd been talking about for a while, which is differentiation. You can't talk about it as a group anymore. If you generalize, you run the risk of missing some great investments. So, I think the key point is, focus on individual companies.

BERMAN: What I think is going on is there are some clear big-stock favorites. Citicorp, and Chase with its big merger. That's where a lot of investors have rightly focused.

I believe in a rubber band effect. If these bigger banks continue to deliver, and I think they will, and the smaller ones have their business priorities right, you can see a lifting of a broader base of regionals that have not performed to date.

As the leaders advance and then consolidate for a while, but still deliver good results, there'll be a shifting down of investment into smaller cap regionals that are also continuing to deliver solid fundamentals.

ALBERTSON: The area where I think differentiation will occur dramatically, now, is in marketing. One of my favorites is Banc One. Everyone's sort of questioning whether or not they can become this big, new national bank after being that great, little local community composition.

And I think they're going to knock the wraps off the ball. They're just one more bank that's pretty much seen the light of what technology can do. You're going to see that the banks that really win are the ones that keep the revenue line working because they're much, much better at marketing.

BROWN: This industry has not been good marketers historically. They've got to become good marketers. But they've got to become good marketers at a time when the whole marketing approach to the United States is changing - going away from mass marketing to interactive marketing. And that's why I like the card companies so much because the card companies are leaders in direct selling and interactive marketing, just where the banks are trying to get.

Bank mergers have slowed from last year's pace, at least in terms of dollar value. Is this a temporary lull or a more significant shift?

KRAUSHAAR: My expectation would be that we're in a temporary lull. In the foreseeable future, you're probably going to see more of an emphasis on product-line type acquisitions rather than whole bank mergers.

I think an awfully big question may end up being how the SEC moves on purchase versus pooling accounting treatment. It does seem that the SEC's tendency has been to push for purchase accounting deals. And here again, it may limit some of the bigger kind of transactions that could be done at high premiums.

BROWN: How do you justify that comment when Wells Fargo pays three times book value for First Interstate (with a purchase)? That didn't limit the deal.

KRAUSHAAR: You had a buyer that traded at an exceptionally high nominal price-to-book ratio.

BROWN: See, I don't think the accounting has anything to with that. I think the CEOs have everything to do with it. You still have CEOs like Dick Kovacevich (of Norwest) that are saying, "Goodwill is nuclear waste."

And they're fighting yesterday's battles. And it seems to me that the winners are not going to care what the accounting method is. They're going to look for return on investment like Wells does.

ALBERTSON: There are a lot of cross-trends. I think the pooling issue is one. I think the basic desire to own a bank may be one. A lot of banks are listening to the virtual bank theory - the alternative delivery channel theory and saying, "Do I really want that branch network? Do I really want a bank?" I think when the day is done, anyone who still has a good interregional franchise that can be bought - you know, nice top five kind of structure, probably will go.

BERMAN: My thinking is that we've had this rush of companies getting together, buying either customers and/or geographics. Now is the time to really focus on issues evolving on the credit side with bankruptcies and credit concerns. The issue is really to focus inward now, and to make something more out of what they have acquired. I think that's the No. 1. priority of many managements.

ALBERTSON: I think the investor is getting a little tired of chasing sectors and hot ideas. I think investors are now starting to look more towards the performance. It's no longer a dull concept. And with a potentially slowing economy, that could have more impact.

Is consumer credit an issue that will continue to plague the banking industry?

KRAUSHAAR: Beyond the case of chargeoffs, I think in the short term, there are also many question marks about whether certain revenue streams can really be sustained when you have this consumer cloud overhanging the industry.

So many banks seem to have had their earnings disproportionately driven by consumer revenues of one sort or another.

ALBERTSON: I'm in the middle, because I think banks who generate steady revenues through thick and thin create suspicion because they lend. But the reason I'm in the middle and not worried so much is that right now that revenue-generation bubble that we've gone through - big, big bubble - was all consumer lending.

The consumer does not tend to explode on you. The consumer always stops borrowing before recessions, always de-levers before economic trouble - they're actually very sensible borrowers, and they've been throttling back on their own for several months. You only get hurt when the corporate sector has a big borrowing boom. And we haven't had one of those.

BERMAN: The jury's still out. We don't know for sure what's going on. The First Chicago meeting last week certainly raised another question. And they seemed to be saying, "Well, we see something a little different in May and June, and it's not just a particular vintage. It's not a particular region; it's everywhere."

I'm not convinced the card companies are going to be the greatest stocks from here with what's evolving. You need your credit to work out favorably for you. You're making a macro call on credit cards trends. Even if you are good at it - if the numbers get scary - it knocks everybody down, even the guy that's doing a good job.

BROWN: I think things got scary in '91. And, you know, since that period , the average annual return of MBNA is 50%. The average EPS compounding and growth of EPS is in excess of 20%. These stocks - the credit card stocks - are the most misunderstood consistently in the marketplace.

KRAUSHAAR: I think a lot of the offsets to the higher losses that we're seeing this year can be managed maybe for another year. But then, there's a big gray area beyond that. Banks cannot rely on fee increases and reduced marketing expenses forever as a means for offsetting what may prove to be structurally higher long-term credit costs.

BROWN: See, I think our discussion is great. Because out of all this is why you can make so much money. Because it's the people that aren't willing to make a bet that an MBNA is different today from a Banc One. Go with the best when the market is dragging them all down because of an industrywide trend, and over the next year, as we saw last year, the superior companies will win out.

ALBERTSON: It's interesting, for 75% of this session, we've been cornered into and have willingly jumped into this discussion on cards.

I do think that's reflective of where the investor is right now. And I've never seen an investor relax about a problem until it's been tested for a couple of quarters. At least this one's been out there for six months.

BROWN: I'm actually more worried about commercial loan quality, partly because of where expectations are on the commercial sector. They're still a number of banks that I cover that have absolutely no commercial loan losses, and all it takes is one credit problem for them not to meet their estimates.

Are we going to see fewer stock buybacks? Has that trend peaked for this cycle?

BROWN: I think we're seeing a compounding effect now; the real positive effect of the shares that companies bought last year are now having a real positive effect on EPS in 1996.

KRAUSHAAR: It's hard to find the next company that's going to initiate a big-time buyback. But we calculated that buybacks in '96 and those that we expect in '97 will add about 50 basis points to the expected 1997 ROE. There are some companies like Citicorp or BankAmerica or Chase where buybacks might add anywhere from 100 to 400 basis points to next year's projected ROE - a very powerful source of differentiation for reported returns.

BERMAN: One of the risks is that we get a harsher conclusion from the SEC on this buyback issue, locking the door for considerably more than six months after a merger. I have been anticipating that Chase will do something in the fourth quarter, but an unfavorable SEC stance could present a problem for them.

What are the suspicions about the SEC?

ALBERTSON: That they may be like the SEC we remember that changes its mind part of the way through, or interprets differently. Everyone's assuming six months. And everyone I can think of that is a potential share buybacker is presumed back in the market 181 days after a pooling.

But, one or two of them, I think, have gotten cold feet. They don't want to find out the hard way.

Does that include First Chicago?

BERMAN: Yes. They're waiting for clarifications.

KRAUSHAAR: I think it's an elaborate game of chicken. Unless the SEC really clarifies things, nobody's going to want to be the first to potentially have their deal's accounting undone.

If consumer problems don't blow up banks, and the commercial sector is not overly leveraged, and the Fed is presumably this week not going to raise rates at least, what could possibly go wrong? Are there any icebergs out there in the water?

BROWN: One is still acquisitions. Excess capital is still a double-edged sword in that you can go out and overpay to acquire somebody else's franchise. Right? I guess, it's been one of the positives for 1996, is that we haven't seen the excessively priced acquisitions. In my opinion, that's still a major risk.

ALBERTSON: I think by far the biggest risk is not that the consumer blows up. I don't think they will. But that one or two financial services providers stumble over the consumer and spoil it for everyone for six months.

KRAUSHAAR: I believe the bigger risk is a macro risk that you get a very seemingly strong economy, much more so than any of the consensus expects today. And that would precipitate in the short-term a shifting of perception about relative earnings momentum for banks versus nonbanks and then a subsequent flattening of the yield curve which would and make it very difficult for banks to sustain their revenues, and possibly raise incremental credit problems.

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