As banks hunt for businesses with fatter profit margins, the equipment- leasing market has become an appetizing target.

About 80% of all U.S. companies lease all or some of their equipment, according to the Equipment Leasing Association in Arlington, Va. Leasing assets grew to $1.7 billion in 1996 from $777 million the previous year, a recent association survey of bank lessors found.

Banks have been eagerly tackling the field. Citicorp Global Equipment Corp., NationsBanc Leasing Corp., BancAmerica Leasing & Capital Group, First Union Leasing, and KeyCorp Leasing have dominated the ranks of bank lessors, according to The Monitor, a bimonthly publication of Molloy Associates, an Ardmore, Pa., firm that recruits for the leasing industry.

"Banks have really stepped up and become major players in equipment leasing as a part of their increasing desire to focus on businesses with strong returns," said Rick Wolfert, president and chief executive officer of KeyCorp Leasing Ltd., Albany, N.Y.

But as banks have flooded into the business, competition is beginning to cut into returns, some bankers said. "The growth in assets has been a piece of cake; the challenge is growing profitably with competition such as it is," said Chuck Langer, president and chief executive of U.S. Bancorp Leasing and Financial, Portland, Ore.

"Competition is incredible-it borders on the insane," Mr. Langer added. "Margins are under pressure, and leasing companies that rely on spread or interest income are feeling the pinch."

In the most recent major leasing deal, Cleveland based-KeyCorp agreed in April to buy 80% of Leasetec Corp., a Boulder, Colo., equipment leasing company. Others, including Mellon Bank Corp., BankAmerica Corp., and TCF Financial Corp. have snapped up equipment-leasing companies or their portfolios in an effort to gain a larger presence.

Bank analyst Frank Barkocy of Josephthal, Lyons & Ross said that in looking to complement existing operations with additional sources of revenue major financial institutions are increasingly moving into nontraditional areas.

"The objective is, if you're going to do it, you're going to build a meaningful presence in the sector and carve out niches in the market," Mr. Barkocy said.

A friendlier regulatory environment has also helped foster the popularity of equipment leasing. At the end of last year, the Office of the Comptroller of the Currency adopted rules that allow banks to acquire personal property for leasing before they enter into specific leasing transactions. The OCC also allowed national banks to rely more on the residual value of leased property than on the creditworthiness of the lessee.

Regulators are considering whether national banks should be allowed to include real estate in lease financing. The leasing association has suggested that banks should be able to lease real estate along with personal property, as long as real estate is less than 50% of the whole transaction.

But with banks crowding into a marketplace already populated by nonbank lessors, equipment leasing has become vulnerable to the same problem as other traditional banking businesses: a profit-margin squeeze.

The recent surge in competition has put the greatest pressure on the middle market-transactions ranging from $200,000 to $5 million, said Mr. Langer of U.S. Bancorp. Private, family-owned companies are getting prices normally reserved for investment-grade companies.

The industry has "slit its own throat" by creating structures and products, such as buyout guarantees, that limit the upside potential for lessors, Mr. Langer said. Still, in the last two to three years, credit losses have been virtually nonexistent across all sectors, he said.

"I don't think banks are entering these areas willy-nilly," Mr. Barkocy added. "They're either buying talent along with the operation or shoring up their skills in that sector. I think major players will develop in some of these areas that banks are making initial forays into."

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