Many bankers adjusted quickly-and not necessarily with defeatist attitudes-to the reality that their five-year run of record profits is over.

Despite the recent resurgence in stock market optimism, the events of the third quarter that depressed industry earnings are still widely interpreted as a turning of the cycle. But that did not obscure some jewels of business units whose profits continue to grow at or near double-digit rates.

Managements just became more selective and inclined to reemphasize the basics of those businesses.

"We're predicting a slowdown, not a recession," said Fleet Financial Group president and chief operating officer Robert J. Higgins.

"We're well positioned for a softening in asset quality," he said. "Our strategy is to change and adapt our core businesses."

At Boston-based Fleet, that means digging through the commercial loan portfolio to find customers for cash management services and using retail branches to pitch investment products.

That type of reassessment, tending toward fees and sustainable growth and cross-selling, has been under way throughout the industry at least since the summer's financial market break. Some of the directions taken and available are spelled out in a package of articles beginning on page 6.

"We're pretty enthusiastic," Mr. Higgins said. "We're actually feeling pretty good about the prospects for 1999, even if there is a downturn."

Opportunities are perceived in markets where banks have historically prospered, such as mortgages and credit cards, in fee-based activities such as noncredit services to corporations, and in areas not yet fully tapped, such as on-line banking and the small-business and middle-market sectors.

Some, such as Sovereign Bancorp of Wyomissing, Pa., are not neglecting diversification. Sovereign plans to step up sales of property and casualty insurance to retail customers, said chief executive officer Jay Sidhu.

But Mr. Sidhu said his main focus is on businesses with less than $75 million in annual revenue, and on "basic consumer banking superbly executed."

Anticipating a 12- to 18-month economic slowdown, Mr. Sidhu said, "Our surveys show people are not cutting back on their capital spending more than 11%, and we expect 9% cutbacks in employment at small and midsize companies."

Wells Fargo & Co., the San Francisco-based combination of the old Wells with Norwest Corp. of Minneapolis, will continue its long-standing emphasis on cross-selling, and it expects to rely on a large and successful mortgage subsidiary that seems never to let up.

"The mortgage company in 1998 will have its 10th consecutive year of increased earnings and eighth record year in a row," said the executive vice president in charge, Mark Oman. "We'll look to 1999 to continue those."

Economists expect mortgage originations to taper off somewhat, but Mr. Oman sees no catastrophe in that. As new-home buying slows, customers may take out home equity loans. If the economic downturn spurs more Federal Reserve rate cuts, there could be another upsurge of refinancings.

"We try to position ourselves to reap the benefits of a recession," Mr. Oman said. "The two parts of our portfolio-servicing and production-are countercyclical. The mortgage business is more a fee generator than a spread-based business."

The merger boom of the last two years should also yield benefits, bankers said.

Fleet, which bought the discount brokerage Quick & Reilly in 1997 and the credit card business of Advanta Corp. this year, expects both to help its bottom line substantially in the next two years.

Norwest, through its acquisition of Wells, became a $197 billion-asset holding company and "added five new markets to the traditional Norwest area," Mr. Oman said. Those states-California, Idaho, Washington, Utah, and Oregon-"are great markets. California most years accounts for 20% of all the mortgages made in the United States."

Creative thinking is crucial at a time like this, said Seamus McMahon of First Manhattan Consulting Group. With real interest rates low, earnings from deposit-taking cannot be counted on as they have been in past slowdowns.

"Every reduction in interest rates shaves spreads, with no way to pass it on," he said.

Mr. McMahon said the economy will favor large regional banking companies such as Wachovia Corp. and First Union Corp. that do not have international and hedge fund exposure.

"If there is a liquidity crunch and good companies and households can't get loans, then regional banks can steal market share," Mr. McMahon said.

He said small-business banking has been suffering from "benign neglect" at many banks. Insurance and credit card businesses can also be profitable in a softer economy, he added.

Oliver Wyman & Co., another New York-based consulting firm, predicts that by 2002, revenues from traditional lending and deposit-gathering will grow 7%, well below the 26% expected from insurance businesses and 60% from investment services and capital markets.

Banks would do well to offer small-business and retail customers insurance and financial-planning advice "that is not simply product pushing," said Peter Carroll, the head of Oliver Wyman's consumer financial services practice.

The trick in the coming slowdown is to "cannibalize someone else's business," he advised-payback for the market shares ceded to nonbanks over the years.

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