Big Banks Strengthened Ratios in 1st Half

Major U.S. banks, in aggregate, boosted their capital ratio in the first half of 1991 as they added more equity than loans to their balance sheets, according to a report by Salomon Brothers Inc.

For 11 money-center banks, Tier 1 capital - largely equity - rose to 6.25% of risk-weighted assets on June 30 from 5.66% at yearend 1990, Salomon said.

Same Story at Regionals

Parallel increases occurred at 18 superregional companies, to 7.38% from 6.72%, and at 21 regionals, to 8.86% from 8.34%.

The improvement of more than 50 basis points in each group indicates that bankers are heeding regulators' and investors' calls for more capital. But the increases had more to do with a renewed capital-raising ability than with profitability, which has been anemic.

For the 50 banks in the Salomon study, taken together, Tier 1 capital rose to 7.5% of risk-weighted assets from 6.91%.

Only three of the 50 companies had declines: AmSouth Bancorp. by 68 basis points to 7.97%; Bank of Boston Corp. by 40 basis points to 4.80%; and NCNB Corp. by 17 basis points to 6.69%. Banks must maintain at least 4% by the end of 1992.

Republic New York Corp. and State Street Boston Corp. registered the highest ratios, 13.66% and 13.10%, respectively. Each was up almost two percentage points since yearend.

The trend to higher capital ratios underscores the lack of asset growth at major banks. And it masks the fact that banks are generating new capital by tapping the public markets rather than by retaining earnings.

"People have gotten the message that capital is good," said David Berry, an analyst at Keefe, Bruyette & Woods Inc.

A flurry of preferred stock issues was a major factor in the increase in ratios.

Banks issued $1 billion in straight preferred stock, $950 million in convertible preferred, and $2.02 billion in common equity through public offerings, according to data compiled by IDD Information Services.

Shrinking balance sheets also contributed to the growth in capital ratios. Banks securitized more than $12 billion in consumer loans, such as credit card receivables and automobile loans, in the first six months of the year, for example. Many banks also shed businesses.

But for the most part, banks have boosted equity capital ratios through public stock offerings, rather than by generating profits and issuing new shares via dividend reinvestment programs - so-called internal capital generation. generation.

Slow Growth

The 50 big banks followed by Salomon Brothers reported internal capital generation of just 6.2% for each of the first two quarters. The money-center group had internal capital growth of just over 5% in the first half.

The lackluster profits are troubling because if banks find themselves shut out of the equity markets again, they will be hard pressed to keep capital ratios high and sustain any material growth.

"The Fed has given banks a license to mint money through the steep yield curve," allowing them to lend long term at high rates and borrow short term at low rates, said Charles Peabody, an analyst at Kidder, Peabody & Co. "But it's still not translating into retained earnings."

Table : Bank Capital Ratios Are Rising...

Tier 1 capital as a percentage of risk-weighted assets 12/90 6/91Money-center 5.66% 6.25%Superregionals 6.72 7.38Regionals 8.34 8.8650-bank average 6.91 7.50

But Internal Profit Growth Is Slow

Return on equity net of dividend payments 1Q '91 2Q '91Money-centers 1.3% 3.8%Superregionals 8.1 6.1Regionals 9.2 8.650-bank average 6.2 6.2

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