Seeking to calm jittery investors, Banc One Corp. offered a detailed view Wednesday of its controversial derivatives portfolio, which is unusually large for a regional bank's.

In front of analysts in New York, chairman John B. McCoy defended the Ohio-bug bank's extensive use of interest rate swaps, calling them an integral part of asset and liability management.

|More Effective' Swaps

Banks have traditionally used bonds to hedge against swings in interest rates, but swaps do the job more effectively, he maintained. The company released data showing how its $39 billion derivatives portfolio boosted profitability in the third quarter with minimal risk.

"We do not have to take risks or go into derivatives we don't understand," Mr. McCoy said.

Banc One's management acknowledged, however, that its increased use of swaps caused concern among investors worried that the company was primarily betting on the direction of interest rates, rather than seeking to manage its own rate risk. Those worries helped fuel a drop in Banc One's stock price.

The company blamed a lack of information about the off-balance-sheet portfolio as the cause of those concerns. Accounting and reporting standards do not require disclosure of details about swaps and other derivatives, or give direction for standardized reporting of these instruments.

By going public with the details of its holdings, Banc One - which will make the presentation to analysts in Boston today - has revealed more about its derivatives use than has any other bank.

The company, which has $74 billion of assets, is believed to have the largest derivatives portfolio among superregional banks. Its interest rate swaps and other contracts have a notional, or face, value of $39 billion, up $16.6 billion in the first nine months of the year.

George Salem, an analyst at Prudential Securities, down-graded the stock last week to a "hold," from a "buy," saying he was concerned that Banc One's

earnings might suffer if rates suddenly shifted. That was the first time an analyst had downgraded a bank because of its reliance on derivatives. Mr. Salem was traveling and could not be reached for comment about yesterday's presentation.

S&P, Moody's Satisfied

On the other hand, credit analysts at Standard & Poor's Corp. and Moody's Investors Service Inc. were satisfied with the bank's management of risk and its employment of swaps. Moody's, in fact, recently elevated the bank to an AA rating, the first such rating it had given a bank in 14 years.

Whether derivative use has anything to do with Banc One's falling stock price isn't clear in any case. Many analysts have said that the stock price has been pulled down because investors fear the bank will make a bad acquisition and hurt its earnings.

In the past three months, Banc One's share price has fallen 12%.

Shares of the bank were up 50 cents Wednesday, to $37.875. Volume was heavy, with more than one million shares changing hands.

Hedging Rate Risk

The bulk of Banc One's derivatives, $22 billion, are used to hedge interest rate risk, with an average maturity of about two years. These contracts call for Banc One to make payments that vary in rate and to receive payments of a fixed rate. That's to balance the bank's core business, in which it mostly receives variable-rate payments on loans and pays depositors set amounts.

Richard D. Lodge, senior vice president at Banc One, defended the size of the bank's swaps portfolio by pointing out that its earnings are big, too. By his calculation, $1 billion of swaps provides a hedge for only $3.5 million.

Many other banks use their bond portfolios to hedge risk. But swaps allow Banc One to customize its instruments. In addition, "it's hard to buy Treasuries in the size we would need to manage risk," said Mr. Lodge.

That $22 billion is misleading in that it does not reflect Banc One's risk, which is much smaller.

Mr. Lodge said that, right now, Banc One's use of interest rate swaps is set up to take advantage of a falling interest rate environment. If rates rise 1% in the next 12 months, and if Banc One does nothing to change its hedges, the bank's net income would be 3.3% less than expected. Mr. Lodge said he considers that risk small potatoes to an institution that will earn about $1 billion this year.

Nevertheless, derivatives have been key to the bank's performance this year. Swaps accounted 70 basis points of the bank's 6.22% in net interest margin at the end of last quarter.

If Banc One had gone the more conventional route of using Treasury securities to manage risk, the margin would have been 4.58%, Banc One calculated. Indeed, if Treasury securities or money market assets had been used to manage risk, the bank's performance in net interest margin, return on assets, return on equity, and even capital ratios would have been lower.

How the Use of Swaps Boosted

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