Earnings Power of U.S. Money-Centers Found Strong

LONDON -- U.S. money-center banks are outperforming many of their big European and Japanese counterparts by various measures of earnings and revenues, a recent study by Merrill Lynch & Co. has found.

The American banks are outdoing their brethren in Japan, Germany, Switzerland, France, the Netherlands, and Italy when ranked in terms of operating earnings as a percentage of average assets, according to Merrill Lynch's global banking survey, released last week.

Banks in Britain and Spain ranked higher than the U.S. institutions surveyed.

Aiming to measure the operating efficiency of the world's major banks, the analysis covered 67 banks from 14 countries.

U.S. banks were ranked sixth among banks in 14 nations when measured by earnings, although profitability was measured without accounting for loan-loss provisions. Since declining asset quality is a current burden for American banks, the methodology improved U.S. banks' ranking.

The study showed that American banks must still be included among the most soundly based banking industries around the world, given their "high revenue-generating potential," Merrill analysts said.

In terms of gross revenues as a proportion of average assets, U.S. banks ranked fifth of the 14 countries surveyed. But using overhead criteria, they slipped to ninth position when ranked by noninterest expenses as a percentage of total revenues.

Overall winners in the rankings were highly efficient banks in, while the clear losers where Japanese banks, which trailed competitors in all other industrial nations surveyed.

The Spanish banks have exceptionally high net interest margins, with high fee income and expansion in lending volumes since official credit controls were lifted at the end of 1990, the study observed.

Assessment of Quality

The survey, according to Merrill Lynch analysts, aimed to assess the quality of earnings and assets at a time of recessionary trends in much of the world economy.

Overall, U.S. banks posted gross operating earnings at an average 1.5% of their assets while the winning Spanish banks scored a ratio of 2.25%.

American banks' gross revenues equaled 4.5% of their average assets against the Spanish banks' 5.25%.

Singapore Banks Frugal

The Americans' noninterest expenses work out at 68% of gross revenues. Leading banks in this sector were leanly-run institutions in Singapore, with a efficiency ratio of about 35%.

Merrill analysts noted that for U.S. banks, return on assets is becoming a less meaningful measure of performance because of the trend toward asset securitization and displacement of spread income by noninterest income.

However, they professed themselves to be more optimistic about the outlook for the U.S. industry.

"First, revenues appear to be stabilizing for most banks after two years of virtual implosion," they said.

"Second, we think a more stable revenue environment will give many banks important breathing room to more intelligently plan and pursue downsizing operations."

This, for example, includes the initiatives to reduce the size of unprofitable operations at Citicorp and Chase Manhattan Corp. as well as the efficiencies expected from the pending mergers between Chemical Banking Corp. and Manufacturers Hanover Corp. and Bank-America Corp. and Security Pacific Corp.

The analysts said while the idea of more banking mergers in America may have been "over-emphasized, we would not be surprised to see various joint ventures.

Such an approach may be a rational means for many firms to defend their earnings streams in specific business lines."

Among individual banks, Bankers Trust New York Corp.'s long-held strategy to become a fee-earning investment banking force has paid off handsomely, the survey data showed. It ranked as the top-performing bank in the world when measured by noninterest income as a percentage of average assets. Its ratio was 3.60% versus the 3.15% of its nearest rival, Citicorp.

U.S. Bank Profitability Remains World Class

Operating earnings as percentage of average assetsSpain 2.45%Ireland 1.80Australia 1.79Britain 1.68Singapore 1.48United States 1.46Denmark 1.14Italy 0.99Switzerland 0.96Netherlands 0.89France 0.76Germany 0.76Belgium 0.62Japan 0.30

Source: Merrill Lynch & Co.

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