Major banks increasingly are relying on noncore funding to support loans, says Smith Barney Inc. analyst Henry C. Dickson, and that does not bode well for growth and profitability trends.

In a recent report, Mr. Dickson said that at Sept. 30, 16 of the 29 regional banks he covers were funding less than 100% of loans with comparatively cheaper core liabilities such as demand deposits and domestic certificates of deposit under $100,000.

By contrast, he said, only six of the 29 institutions were similarly positioned a year earlier.

"We believe the lack of cheap core funding to support loan growth, and the possible margin burden this represents, is one of the major issues facing regional banks," said Mr. Dickson.

Even as increasing numbers of banks take aboard higher-cost jumbo CDs, foreign deposits and short-term borrowings, Mr. Dickson said, loan spreads are stagnating. The upshot is that lending, in many instances, is becoming progressively less profitable.

This phenomenon helps explain why banks are repurchasing stock, continuing to pare overhead, and embracing securitization, said Mr. Dickson.

While amply-funded institutions such as Norwest Corp. appear well positioned for further growth, Mr. Dickson said top-performing banks such as Fifth Third Bancorp and Wachovia Corp. already are bumping against funding constraints.

Even banks with seemingly ample core funding, such as First of America Bank Corp., may encounter difficulties because demand deposits account for low proportions of total core liabilities. In such instances, aggregate funding is comparatively more costly despite its core origin.

While Mr. Dickson uncovered sharp disparities in proportionate funding deficits and surpluses, he cautioned there are a number of potentially important mitigating factors at varying institutions.

High concentrations of cheap demand deposits - as exemplified by the 32.5% ratio of demand deposits to core funds at CoreStates FinancialCorp. - can offset the extra costs of noncore funds.

And setting aside the question of risk, comparatively higher loan yields can go a long way in mitigating funding issues.

Equally important, Mr. Dickson contends, is the degree of a given bank's reliance on more purely discretionary assets, such as mortgage-backed securities, and discretionary liabilities, such as short-term borrowings.

Rising rates have been unkind to "managed" portfolios, Mr. Dickson noted, and those institutions most dependent on them face added potential pressure.

He said Bank of Boston Corp., NBD Bancorp, and Comerica Inc. are among the institutions having comparatively high dependencies on managed portfolio revenues.

Efficiency can offset funding issues, and Mr. Dickson mentioned Fifth Third, Wachovia, Star Banc Corp., First Bank System, and First Fidelity Bancorp. as being leaders in generating revenues per dollar of employee expense.

Mr. Dickson said Fleet Financial Group, PNC Bank Corp., and Shawmut National Corp. were among the regional banks that stood to augment results through lowered loan-loss provisions. But he said Banc One Corp., Comerica, and NBD have comparatively less flexibility on this score.

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