For U.S. Banks, the Year Past Was a Rugged Test

Until the recent announcements of mergers between several U.S. banking giants, many large institutions here seemed mired in a bottomless bog of bad loans, managerial timidity, and regulatory backlash.

On July 15, New York-based Chemical Banking Co. and Manufacturers Hanover Corp. proposed to tie the knot. Following suit earlier this week were Southeast leviathans NCNB Corp. and C&S/Sovran Corp.

Looking past the excitement, there are no guarantees that the combinations will blaze a trail to profitability. Or that the moves will trigger a long-expected wave of other big mergers that will reduce a crippling overcapacity in American banking.

Not Many Events

In fact, if you scratch July, the high points of the past year in U.S. banking probably could be counted on one hand:

* In Washington, the Bush Administration's deregulatory banking bill has advanced farther than anyone would have bet six months ago.

* Bank stocks jumped 32% in the first half of 1991, rebounding from last fall's nadir.

* Wall Street embraced banks in another way, showering more than $5 billion of public capital on them in the first three months of the year. And investors such as Warren Buffett and Kohlberg, Kravis & Roberts gave banks a vote of confidence with new cash infusions.

* The worst of the thrift crisis is over, though there are doubts as to whether thrifts will continue to survive.

* Banc One Corp., J.P. Morgan & Co., Wachovia Corp. and a few others remain stalwart flag-wavers for the banking industry.

A Longer List

The list of negatives, however, is much easier to compile.

* Prolonged credit problems have meant continuous quarters of climbing loan loss provisions, bigger writeoffs, and lower earnings.

* Bank stocks, as measured by Salomon Brothers 35-bank index, have retreated 12.1% from their June 4 high.

* Twenty-four of 140 bank companies that are followed by Keefe, Bruyette & Woods are now paying no dividends on common stock, an "all-time high," according to the brokerage firm. Twenty-three have reduced or eliminated dividend payments this year.

* The Senate, and John Dingell's House Energy and Commerce Committee, are devising bills that could compromise the radical blueprint that came out of the House Banking panel.

* The commercial real-estate market shows no signs of revival, meaning years more of bad credits and higher expenses for managing foreclosed properties.

* Bank executives are writing thousands upon thousands of pink slips. Big mergers, the most efficient method of economizing, will mean even more layoffs.

* A fickle relationship with regulators keeps bankers and investors edgy.

* Congressional and regulatory demand for stronger capital ratios increase asset sales and inhibit banks' desire to grow.

* Bank of New England Corp. failed, and scores of other once-healthy banks are on regulatory watch lists.

Survival Comes First

For American bankers, in short, it's a time to endure, not thrive.

"I cannot recall when anyone has been more pessimistic than they are now about the outlook for the U.S. banking industry," said Robert Dugger, chief economist for the American Bankers Association.

Everybody has a favorite culprit when assigning blame for the decline of U.S. banking.

Walter Wriston, the former chairman of Citicorp, looks to Washington. The "regulatory recession" and the emphasis on capital have exacerbated the pains of the economic one, he says, constraining large banks' global ambitions.

"When the wind began to blow and troubles mounted with the recession in the last couple of years, Congress began to hunt not for solutions but for scapegoats," Mr. Wriston complains.

Bankers concede, however, that some of the problems lie at their own door.

Mr. Wriston skewers bankers' timidity. "People began to withdraw from the global marketplace over the past few years partly as reflection of American parochialism," the outspoken elder statesman said. "They'd rather have a bad loan in Des Moines than a good loan in Hong Kong."

Reasons for Modesty

Mr. Wriston, of course, may be lamenting the passage of his own era, when American banks' ambition knew few bounds. But after the Third World debt crisis, the real-estate crisis, and the leveraged-buyout backlash, banks have been forced to learn modesty.

The old formulas, say many bankers, no longer work. Or alternatively, bankers forgot the basics of their craft.

The result is a withdrawal from global competition that bankers just two years ago would never have predicted.

"There is no question that a number of the banks that were active internationally are showing visible signs of retreat," said George Vojta, executive vice president of Bankers Trust New York Corp. "Today's successful competitors will look very different from a traditional commercial bank dominated by portfolio lending."

Mr. Vojta said banks must excel across lending, fiduciary, and securities markets if they want to dominate the world scene. Bankers Trust and J.P. Morgan & Co. will be among the select few U.S. commercial banks that will succeed, he added.

Despite Mr. Vojta's optimism, many experts say that U.S. regulatory shackles on banks at home make it difficult for them to develop the expertise to compete internationally.

"If we allow things to continue the way they have been for the last decade and don't make the industry more competitive, U.S. banking institutions are doomed to be second-rate worldwide," said Edward Furash, a bank consultant in Washington, D.C. "Without some of the more significant changes and powers in the House Banking bill, they will be permanently disadvantaged."

"U.S. banks cannot become insular," preached John B. McCoy, chairman of Ohio-based Banc One Corp., "because the world is a global market. But don't expect to see us in London on Paris or anyplace else overseas."

Lowell Bryan, a consultant at McKinsey & Co., looks at the regional giants, and sees strength. "We've gone through a whole lot of pain experimenting with competition, and that's hurt us," Mr. Bryan said.

Table : United States Top Five Ranked by assets; dollars in millions Year ending Percent World 12/31/90 12/31/89 change rankCitibank $155,394 $157,772 -1.5% 26Bank of America 94,763 85,340 11.0 54Chase Manhattan 73,360 82,109 -10.7 69Morgan Guaranty 67,627 63,465 6.6 76Manufacturers Hanover 56,560 53,644 5.4 89

Source: American Banker

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