Growing Trend: Profitability Rises at Biggest Banks

The steady climb in U.S. bank profitability, a constant through the 1990s, isn't letting up.

The 49 largest banking companies averaged a 1.34% return on assets in the second quarter, up from 1.23% a year earlier, according to American Banker's latest survey. (See tables beginning on page 6.) That performance measurement has been rising steadily since the 0.61% registered at the end of 1990.

Analysts attributed the recent performance to increased revenues from nontraditional activities such as fee-based transactions, trading, and equity investments, as well as the industry's cost-cutting discipline.

"This was largely a revenue-driven quarter, and noninterest income was strong across the board," said Thomas Hanley, a banking analyst at the UBS Securities Inc. subsidiary of Union Bank of Switzerland.

Mr. Hanley said noninterest revenues came in noticeably above expectations, led by stronger than expected trading profits as well as robust fees from investment management and investment banking and trading.

The average return on assets at the nine largest banks rose to 1.12%, from 1.05% a year earlier. Citicorp led the "megabank" category with an ROA of 1.42% and return on equity of 20.64%; Wells Fargo & Co. and First Union Corp. were the second and third most profitable of the large banks.

But Citicorp's ROA was exceeded by 16 banks in the two smaller-size categories of the American Banker quarterly analysis. MBNA Corp., a credit card bank company, was tops in ROA and ROE, and it had the lowest ratio of nonperforming assets to total assets.

Superregionals - those with assets of $25 billion to $100 billion - turned in the best group performance, averaging a 1.41% return on assets, up from 1.28%.

Large regionals, the 20 largest banks with assets of $10 billion to $25 billion, delivered an average 1.36% ROA, up from 1.25%.

That was well ahead of institutions at the low end of the "mega" category. Bankers Trust New York Corp. reported a 0.51% return on average assets and 12.9% return on common equity, and J.P. Morgan & Co., 0.84% ROA and 16.96% ROE.

Behind the strong improvement at Citicorp lay 12% growth in second- quarter net income, to $952 million.

As part of the widespread reorganizations in the industry, analysts said, banks - especially the biggest ones - have reduced their reliance on the traditional spread between borrowing and lending interest rates and are emphasizing fee-based activities.

"The nature of the business has changed substantially, and a major differentiation is occurring between major banks and others," said Richard Bove, a banking analyst at Raymond James & Co. in St. Petersburg, Fla.

Since banks can no longer rely on low-cost retail funding, he observed, success for commercial banks increasingly depends on having strong capital markets activities.

"Banks that have built enormous trading operations, that understand the use of derivatives and make huge venture capital investments, are building in a level of profitability that simply doesn't exist for other banks," Mr. Bove said. "Those banks will be the winners."

Other analysts sounded a similar theme.

"Stunning venture capital gains and trading results once again propelled solid noninterest income growth at most of the banks in our coverage," noted Sanford C. Bernstein & Co. in a recent analysis of second-quarter results.

"While the best trading and venture capital quarters of 1996 are probably behind us, expense control and efficient capital management should remain key themes for the balance of the year," the firm said.

Stronger than expected earnings have already prompted many analysts to revise dividend forecasts.

Of the 29 banks UBS Securities tracks in its primary coverage, 16 posted results that came in above estimates, 9 were in line with forecasts, and only 4 came up short.

As a result, Mr. Hanley said, UBS Securities has revised its forecast for 12 banks, increasing estimates for nine and reducing those for three.

The bullish forecast, he said, came despite concerns among many analysts over possible deterioration in consumer credit quality. The worst has not happened.

"Credit card losses were highly manageable," Mr. Hanley noted. "Despite all the flak, banks earned their way right through the quarter."

Mr. Hanley pointed out that both BankAmerica Corp. and Citicorp posted 8% revenue growth in the June quarter. Because of efficiency gains, net income grew 12% at both, boosted to 18% when stock buybacks were taken into consideration.

"That shows you the kind of leverage coming from these two factors," Mr. Hanley said.

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