While many investors have focused on small banks and thrifts as companies whose earnings are particularly sensitive to interest rates, there is growing evidence that even firms with a greater diversity of businesses may feel the pinch.
Take Marshall & Ilsley Corp. More than 50% of its non-interest revenue comes from data services and a hefty share of its earnings comes from the relatively stable asset-management business.
Despite that, the company has told investors that analysts may be too optimistic in their projections for year 2000 earnings if interest rates continue to climb.
Milwaukee-based M&I reported earnings of 81 cents a diluted share Wednesday, a penny short of consensus estimates, the result of shrinking margins. That sent its stock tumbling more than 7% for the day, to $53.25 a share.
M&I, with $21 billion in assets, is the latest in a series of banks to come up short as a result of narrowing margins. National City Corp. and U.S. Bancorp have also suffered, and their stocks have fallen.
"It is a warning bell that we're at the stage of the economic cycle where there are not excess pools of liquidity, and the funding for your next loan is going to be more expensive," said Ben B. Crabtree, an analyst for George K. Baum & Co. in Minneapolis. "We should expect extremely sluggish growth in net interest income for the whole industry."
Indeed, banks are grappling with the issue, with some faring better than others. Investors and analysts are asking how long banks can keep meeting earnings per share growth of 10% to 12% a year.
While demand for loans has increased, customers have been more inclined to plow extra savings into the stock market rather than into relatively low-yielding bank accounts.
For example, total bank loans and leases grew 2.1% to $3.451 trillion in November, or at an annual rate of 25%, according to the Federal Reserve. During the same time period, deposits grew 1.4% to $3.48 trillion, a rate of 17% per year.
Banks that have loans growing faster than deposits typically must swallow a higher cost of funds.
At M&I, loans in the fourth quarter grew to $16.3 billion, up 3.8% from the third quarter. Meanwhile, deposits only grew 1.7%, or $287 million, to $17 billion. As a result, its net interest rate margin declined to 3.39% in the fourth quarter, from 3.68% for the period a year earlier, and 3.52% in the third quarter.
``The margin has been under pressure for some time principally because retail deposits have not grown as rapidly as loan demand,'' said Mike Hatfield, a spokesman for M&I.
The question is whether M&I's fee businesses can make up for any interest-rate-margin squeezes. Because M&I offers products in technology, including the Internet, it could gain from the expected technological upgrade by banks.
"The pace of technology spending in the banking industry is going to remain very high," Mr. Crabtree said. "If a bank wants to stay competitive, it will have to spend a lot in technology year-in and year-out."
While M&I may fare well with fee businesses, will it be enough for the company to meet earnings estimates down the road? The company said in its Wednesday analyst conference call that consensus estimates of $3.49 a share for 2000 include a 50-basis-point increase in interest rates by the Federal Reserve, but some observers think rates may rise even more than that, further squeezing margins. And that could hurt the stock even more.