Profitability for the nation's largest banks declined in the first quarter, an American Banker survey found. But analysts insisted the industry remains strong and predicted future growth.

The survey, which looked at 61 banks, revealed that money centers, banks with $70 billion or more in assets, earned a return on average assets of 1.02%, while in the same period last year they earned 1.11%.

Superregional banks, those with more than $20 billion in assets, saw returns on average assets drop, too. In the first quarter of 1993, the return on average assets for these banks reached 1.23%. This year they fell to 1.19%.

Net Interest Margins Down

Return on average equity also dropped for these two groups along with their net interest margins.

These numbers were rough on bank stocks this quarter. The ratio of market to book value declined to 126% from 160.2% in the first quarter of last year.

At first glance, all these figures appear bleak, but analysts said these drops do not worry them. Banks are "still performing extremely well," said SNL Securities analyst Scott Winslow. "They're still very healthy. They're still earning a lot of money."

The industry posted a net income of 10.4 billion in the first quarter, only slightly lower than the two previous quarters, Mr. Winslow said.

Record-Breaking Year

To compare these figures to 1993 is unfair to banks, he said, because bank profitability broke records last year. In the third quarter of 1993, the return on average assets was 1.27%, the highest ever for the industry.

Last year was such a good year "you kind of think that there's no place to go but down," Mr. Winslow said.

Instead, the figures should be compared to those of 1991, when the industry was weakened by nonperforming assets and mired in a nationwide recession, he said. That year return on average assets for the industry was a dismal 0.53%, Mr. Winslow said.

Analysts blamed the decline in profitability on changes in accounting principles and losses in bank securities trading. J.P. Morgan & Co., the nation's third largest bank, reported $345 million in net income, 20% lower than income of $432 million before the effect of accounting changes.

J.P. Morgan's trading revenues plunged from $469 million in last year's first quarter to $113 million this quarter.

Bankers Trust New York Corp. got hammered by derivatives. Bankers Trust's trading revenues plummeted 96% to $14 million this quarter.

"For J.P. Morgan and Bankers Trust, ifs a more meaningful number. That's just the business they're in," said Charles Vincent, an analyst for PNC Bank in Pittsburgh.

The survey shows that strength lies behind the declining profitability and return on average equity of the largest banks. Chase Manhattan Corp., for instance, bucked the trend of its peers. The bank's return on average assets increased from 0.61% to 1.26% this year.

The key to the bank's success may lie in the drop in its nonperforming-assets ratio from 3.83% in last year's first quarter to 1.68% this year.

Some See Improvement

Another sign of strength is that while the largest regional banks suffered a little this quarter, their smaller counterparts improved profitability.

Return on average assets increased for banks with assets of more than $10 billion from 1.06% in the first quarter of 1993 to 1.18% this year.

The smallest regional banks also increased their return on equity from 14.71% to 14.96%.

Analysts were stumped why the smaller regionals as a group outperformed their peers.

But they could explain why banks in general remain strong. The main reason, they said, is that loan volume has increased slightly and will continue to grow as the economy improves.

As loan volume has increased, banks over the past year have significantly reduced their total amount of nonperforming assets.

Growth in Lending

At the end of 1993, loan growth for all banks increased 5.8%, according to Sheshunoff Information Services in Austin, Tex. For the banks in the American Banker survey, loans in the first quarter of 1994 grew 10.1% over the fourth quarter of 1993.

Those figures "suggest that the earnings improvements will continue to 1995 and have reasonable prospects that they will continue to 1996," said Paul Mackey, an analyst at Dean Witter Reynolds Inc.

Mr. Vincent, like his peers, is optimistic about bank stocks, but he raised a cautionary flag. As competition for loans intensifies, banks arc offering longer term loans at lower rates than in previous years.

Good Loans Could Turn Bad

The risk is that banks have "less visibility regarding the economy," when they offer two or three-year loans instead of one-year loans. What banks perceive as good loans today could be reclassified if the economy turns sour.

Banks from different parts of the country are performing better and lending more, depending on their region. Banks from California, New England, and the Middle Atlantic states are progressing slower than the rest of the country, analysts said.

Regionally, Southwest banks showed the most improvement this quarter. Although seven of the 19 publicly traded banks there showed declines in return on average assets from the first quarter of 1993 to first quarter 1994, the increase from the fourth quarter of 1993 to this year was 30%, Mr. Winslow said.

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