Putting healthy supplies of capital to good use, especially in fee- based businesses, the nation's biggest banking companies pushed their profitability ratios to new heights in the first quarter.
On average, the largest 59 institutions exceeded 1.4% in return on assets and 18% in return on equity-figures that in past years were hard for even the very best big-bank performers to reach.
A year earlier, the top banks' annualized ROA averaged 1.38%, ROE 17.69%.
The quarterly profitability averages compiled by American Banker - based on data in tables beginning on page 6-are skewed by the exceptional numbers of MBNA Corp. The credit card monoline had a 2.81% return on average common assets and 31.19% return on average common equity in the latest quarter.
But two others-First Maryland Bancorp and Fifth Third Bancorp-also hit 2% in ROA, and Bank of New York Co. came close. Bank of New York, CoreStates Financial Corp., and Citizens Financial Group of Providence, R.I., were around 25% in ROE.
The big banks as a group were well above the industrywide ratios of around 1.25% ROA and 15% ROE that prevailed at yearend 1997, according to the Federal Deposit Insurance Corp.
At the same time, the average net interest margin fell to 4.09%, from 4.28% in the 1997 first quarter.
"Last year there were higher-than-ever credit card losses but record profits," said Bradley Ball, an analyst at Credit Suisse First Boston. "This year there will be losses from loans in Asia, but higher profits. The trend toward better use of capital has helped banks overcome these difficulties."
Gains in asset management, securities processing, and investment banking fees helped the major banks offset the effects of sluggish loan growth, analysts said.
"There has been a serious, conscious effort to increase fee revenues because that's where the growth is," said Stephen Biggar, an analyst at S&P Equity Research.
Bank of New York Co. raised its first-quarter ROE to 24.99%, from 20.90%, while the net interest margin narrowed to 3.33%, from 4.24%.
The $59.4 billion-asset company has been bulking up in fee-generating securities processing business, making 33 acquisitions in the last five years. Analysts said Bank of New York, which reaped 38.6% of total revenues from noninterest sources, has developed a stable stream of fee-related revenues that act as a buffer against loan volatility.
MBNA boosted return on equity to 31.19%, from 29.89%, helped by improvements in credit quality, analysts said. The net interest margin was shaved to 7.37%, from 7.54%.
BankAmerica Corp., which agreed last month to merge with Charlotte, N.C.-based NationsBank Corp., improved its return on equity to 17.89%, from 16.50%. But its net interest margin narrowed to 3.84%, from 4.17%. Of BankAmerica's revenues, 29% came from fee businesses.
First Chicago NBD Corp., similarly poised for a merger with Banc One Corp. of Columbus, Ohio, improved return on equity to 19.90%, from 17.80%, while its net interest margin shrank to 3.67%, from 4.11%. First Chicago generated 26.5% of its revenues from fee-based businesses.
NationsBank's ROE rose to 19.01%, from 14.69%, while its net interest margin shrank to 3.82%, from 4.03%. One-quarter of NationsBank's revenues came from fees.
Banc One's ROE shot up to 20.75% from 16.30% a year earlier. Its net interest margin contracted to 5.36%, from 5.53%. Nearly a third of revenues came from fee businesses.
Analysts also pointed to expense-control discipline as a contributor to bank profits. The big-bank group's average efficiency ratio-a measure of spending to produce revenue-rose marginally to 59.67%, from 59.46%, even as many large banks took merger-related charges.
"Big-time cost savings have been coming out of the recent consolidation phase," said Anthony Davis, an analyst at SBC Warburg Dillon Read.
Analysts said expense controls will be critical to earnings momentum this year, particularly if, as many industry watchers expect, revenue growth trails off.
"Clearly, the industry has done a terrific job on expenses," said Lawrence Cohn, an analyst at Ryan, Beck & Co. "But it's getting harder to hold the line on expenses, and as revenue growth slows, that will get more difficult."