Returns on Equity, Assets Up for 2d Period in a Row

For the second straight quarter, the composite performance ratios of the nation's biggest banks rose from April through June, according to the American Banker's quarterly ranking of returns on equity and assets (see tables beginning on page 8).

Though few observers will go as far as to say that the banking industry is on a long-term swing upward, many feel that it has reached bottom in terms of credit problems and inched forward on expense control and, possibly, revenue growth.

The continued improvements in the second quarter, higher than in the first quarter and substantially better than in the year-earlier period, were evident at money-center banks, super-regionals, and large regionals.

"Most banks reported earnings that were above those forecast," said Judah S. Kraushaar, a bank stock analyst at Merrill Lynch & Co., in a roundup of second-quarter earnings. The performance ratios are, of course, key indicators of profitability.

Money-Centers Shine

The nine big institutions characterized as money-center banks continued their run as the best of the bunch in return on equity and the worst in return on assets. Their mean ROE was 14.38%, up from 11.71% a year earlier and 14.12% in the first quarter.

Their second-quarter ROA, by contrast, averaged 0.78%, or 78 cents for every $100 of assets. That's a jump from 0.60% in the year-earlier quarter and 0.74% three months earlier, but well behind the 0.92% mean of super-regional banks and the 0.86% at other regionals.

The ROE performance at the money-centers was also skewed by the perennially strong performances of J.P. Morgan & Co. and Bankers Trust New York Corp. Morgan weighed in with an ROE of 25.66%, and Bankers Trust was right behind with 25.56%. The two powerhouses bested all 54 banks ranked in the survey.

Citicorp Drags Down Average

The money-center average was diluted, on the other hand, by Citicorp's 4.80% ROE, the fourth worst of all banks listed in the rankings. The key market return also hovered at a tepid 10% at Chase Manhattan Corp., Chemical Banking Corp., and First Chicago Corp.

Continental Bank Corp. in Chicago, bolstered by a lower loan-loss provision ad higher fee revenue, moved up six places in the money-center category from its year-earlier position to No. 3, with an ROE of 14.49%, more than double the 6.38% it had a year ago.

Measured by return on assets, the 24 superregional banks again reigned supreme. Led by Midwestern powerhouses Banc One Corp. and Society Corp., the group -- defined as bank companies with large retail networks and at least $20 billion in assets -- had a mean ROA of 0.92%.

Indeed, half of the banks in the superregional category broke the 1.0% ROA benchmark that Wall Street looks for in the best bank companies.

Better Spreads Help Profits

Wider interest margins and improvements in credit quality continued to be the big factors behind the relatively strong performance of the fast-growing superregionals.

Return on equity for the group stood at 13.03%, up significantly from a lamentable 7.88% a year ago.

The 22 banks characterized as large regionals -- those with assets of $10 billion to $20 billion -- showed wide discrepancies in all performance categories. As a group their ROE averaged 12.89% in the second quarter, up from 7.12% a year earlier and 10.78% in the first quarter. ROA at the regionals averaged 0.86%, up from 0.51% last year and 0.75% in the first quarter.

Strong Fee-Based Businesses

Ten of the group's 23 banks bested the 1.0% ROA benchmark -- led by the midwestern quarter of First Bank System Inc., Firstar Corp., Comerica Inc., and Northern Trust Corp. Eight topped the 15.0% quality ROE benchmark, with Northern Trust, State Street Boston Corp., First Bank, and Comerica taking top honors.

The regional banks that specialize in fee-laden businesses such as trust and custody -- Northern Trust and State Street, for example -- did especially well.

In terms of credit quality, which directly affects returns, the 24 superregionals made the biggest strides in the second quarter. As a group, their ratio of nonperforming assets to total assets fell to 2.65% from 3.02% in the first quarter.

The 22 regionals were close behind with a 2.78% nonperforming ratio, down from 3.02% in the first quarter. The eight money-center banks continued to struggle with a mean NPA ratio of 3.34%, down just a shade from 3.44% in the first quarter.

State Street Boston for the second straight quarter weighed in with the best nonperforming ratio -- another indicator of strength for banks that are not credit dependent. Bancorp Hawaii took the runner-up spot for the second quarter in a row.

Top credit-quality performers in the other categories were Norwest Corp. and Wachovia Corp. at the superregionals and Republic New York Corp. and J.P. Morgan among the money-centers.

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