Business has been brisk for money center banks over the last few months, but price competition could soon begin to put pressure on their profit margins, according to analysts at CS First Boston Corp.
A report just released by the investment bank said that profit margins have held up fairly well during the third quarter. But it added: "The banks have essentially built up extremely liquid balance sheet positions, which inherently is leading to both predatory asset pricing and continued low deposit rates."
Cutthroat pricing, the report added, is most pronounced in the credit card segment of the market, but is also being felt in large commercial and industrial credits. The average spread between cost of funds and the interest rate charged on the C&I loans has slipped to 31 basis points from 34 basis points in December last year and 42 basis points at the end of 1992, First Boston estimated.
The banks have been able to offset much of the pressure on pricing by holding down the interest paid on deposits, First Boston pointed out. "We estimate that bank CD rates are up by only roughly 80 basis points, compared with a 175 basis-point increase in Fed funds."
The low deposit rates coupled with cost cutting, reduced provisions for bad loans and an expected improvement in trading revenues all augur well for money center banks, First Boston said.
The report noted that prices for money center stocks have continued to outpace the stock market. Year to date, First Chicago and Citicorp are the top performers with gains of 20%, followed by Bank of New York with 13.6% and Chase Manhattan with 11.4%.