DALLAS - Will interstate banking ultimately reduce price competition and boost profits for the banks that survive?
The Texas experience suggests that it will not.
It has been nearly 10 years since bad real estate and energy loans devastated the homegrown industry here. The result was a banking market dominated by large multistate institutions.
A decade ago, four Texas-based banks had more than $20 billion each of assets. Today only one bank in the state is that big - and it is a unit of North Carolina based NationsBank Corp. NationsBank Texas had $43 billion of assets on March 31.
Though the market has become profitable, bankers say, for banks the supposed pricing benefits of oligopoly have yet to materialize.
In fact, the friction caused by nine giant out-of-state institutions going head-to-head against each other and some 950 local independents is hurting net interest margins for the big banks, executives said.
"We're seeing lots of competition in rates and in terms, and margins are as thin in the Southwest as they are anywhere," said Ron Steinhart, chairman, president and chief executive of Bank One Texas.
"We've found in all our markets that price and terms are more important, and loyalty is not as important as it once was," the 55-year-old native Texan said.
"This is a battle of titans here," said Rick Parsons, an executive vice president with NationsBank Texas.
Most of the battle is taking place on the lending side.
Rates charged on new loans in Texas were below those of banks nationally, according to an August survey by Bank Rate Monitor.
The average credit card loan in Dallas fetched 17.48%, compared with 17.85% in Houston and 18.21% nationwide.
Likewise, rates in Dallas for new adjustable-rate mortgages, assuming a 10% down payment and no more than 3.5% in origination fees, were 25 basis points below the national average of 5.70%.
In Houston, the average was 7 basis points below the national mark.
First Interstate Bancorp.'s experience after it bought Bank of North Texas in 1984 shows one reason for the heightened competition.
Traditionally one of the largest lenders under the Small Business Administration's 7(a) loan program, North Texas' small-business franchise put Houston-based First Interstate of Texas into the big leagues of small business in the state.
But it also put First Interstate in direct battle with the hundreds of independent banks that thrive on this business, not to mention banks like Bank One that have developed strong small-business operations.
"For almost any client we're calling on, I would say there is at least one other bank calling on them as well," said Linnet Deily, First Interstate's chairman, president, and chief executive in Texas.
Likewise, NationsBank's Mr. Parsons said aggressive tactics by banks and nonbanks in auto loans is causing angst for commercial bankers.
"The pressure is really coming from credit unions that are acting just like banks," he said, referring to their willingness to lend to borrowers outside the membership.
He warned that pricing aggressively to gain market share may eventually create loan problems when interest rates rise again.
Still, Mr. Parsons, who heads Texas' consumer division for NationsBank, said most of the big players have so far resisted the temptation to lower their underwriting standards.
Marc Shapiro, a longtime Texas banker who stayed with Houston-based Texas Commerce Bank as chairman and chief executive after its sale to Chemical Banking Corp. in 1987, said that although today's rivalries are more heated than ever, they will not have the same destructive results as the battles of the mid-1980s did.
"A number of large institutions are competing for the same businesses, those without a lot of credit risk," he said. "But we haven't seen the lowering of credit standards that we did in the 1980s."
Besides, the focus is different than it was a decade ago.
Whereas problems in energy-laden loan portfolios forced the region's banks to make riskier real estate loans to grow out of their problems, today the focus is on areas like consumer lending and small business.
But many banks remain liquid despite the strong loan growth.
Bank of America Texas, for example, is flush with liquidity after its deposit and branch acquisitions in 1992 and 1993. The bank is reportedly scouring the larger metropolitan areas in search of loans to generate earnings on these funds.
But this kind of liquidity also has advantages for banks in the region. Low loan-to-deposit ratios like the one at Bank of America, Texas is one reason deposit prices are low.
Based on its study of the five largest banks in Dallas and Houston, Bank Rate Monitor found some support for the idea that bank deposits in Texas are cheaper than they are elsewhere.
Although they paid a 20-basis-point premium over the national average for money market accounts, banks in the Lone Star State were paying as much as 17 basis points below their counterparts in other parts of the country for deposits maturing in six months or more.
Despite the frantic pace of competition, some banks appear to be thriving.
First Interstate, for instance, reported a 35.5% jump in earnings in the first half of 1995 from last year. Its first-half net income of $61.5 million amounted to a 1.96% return on assets.
These kinds of results justify the continued interest in the state.
In the past three years, Norwest Corp. and Boatmen's Bancshares have acquired major stakes in rural parts of the state.
The results also help First Interstate's Mr. Deily answer talk that size is a requirement to remain a factor in the state. "This shows you don't have to be the largest bank in the region to be successful at what you're doing."