Despite a tidal wave of merger activity, the assets of the very largest U.S. banks-megabanks with $75 billion or more-grew only 4.2% last year, according to data compiled by American Banker.

And at some of them, assets actually declined.

One was Citigroup, the result of the October megamerger of Citicorp and Travelers Group. The data show assets there fell 4.3% to $667.4 billion, when compared with 1997's pro forma level.

Bankers and analysts said the industry, even as it consolidates, has placed more emphasis on allocating capital toward more profitable uses. Loans are not necessarily at the top of the list.

"There is a realization that the size of the balance sheet can't grow infinitely," said Sean Ryan, an analyst at Bear, Stearns & Co.

"By restraining balance sheet growth, banks can allocate their capital more effectively and use it for stock buybacks or acquisitions," he said.

Securitization of low-yielding assets, the sale of investment securities, and a reexamination of lending practices to focus on more profitable corporate relationships have all combined to trim balance sheets, bankers said.

"It's an idea that's gaining steam" in the industry, Mr. Ryan added.

Banks have cleaned up their credit problems from the early 1990s and aggressively recapitalized since then, said David Hilder, an analyst at Morgan Stanley Dean Witter & Co. Expenses have also been whittled away, helping to boost profits.

"The final lever for many banks is capital management," Mr. Hilder said.

Bank finance experts said the trend coincides with the industry's search for ways to boost profitability measures. Citigroup had a slimmer balance sheet and a return on assets of 0.94%, up from 0.64% on a pro forma basis in 1997.

"There is an awareness that you don't have to have balance sheet growth to have revenue growth," said Bradley Ball, an analyst at Credit Suisse First Boston.

The concept has caught on at smaller regional companies, which are "managing their balance sheets because of its importance to return on assets," said Robert S. McCoy Jr., chief financial officer at Wachovia Corp. in Winston-Salem, N.C., which saw assets decline 2% in 1998 to $64 billion.

Wachovia has done everything from securitizing credit card receivables to leasing in order to take assets off its balance sheet, Mr. McCoy said.

Return on assets may reflect the fruits of Wachovia's labors, analysts said. The bank had an ROA of 1.37% last year, a 34-basis-point jump from 1997.

"The industry has become more sophisticated," Mr. McCoy said. "There are more techniques that Wall Street is offering to control capital. Those alternatives weren't available to most of us 10 to 15 years ago."

In other regions, assets at Comerica Inc. in Detroit were flat compared with 1997, but ROA jumped to 1.74% from 1.52% in 1997, according to the data. Assets at PNC Bank Corp. in Pittsburgh grew 3% and ROA remained steady at 1.49%.

A shift toward fee-income businesses has also helped banks pare balance sheets, analysts said. That trend is most apparent for the biggest banks, they added.

Indeed, for banks smaller than $25 billion, assets grew 12.21% last year, reflecting that group's continued emphasis on lending.

"Bigger banks have done more to diversify," Mr. Ball said. "They are spreading into fee-income businesses and reducing their reliance on spread income."

Exposure to capital markets losses and overseas financial tumult may also have been a factor in shrinking balance sheets for some of the banks, analysts said. At Bankers Trust Corp., assets dropped 5% to $133.1 billion last year.

Bankers Trust spent much of the last year reducing its credit and exposure in emerging markets. In November, it agreed to be acquired by Deutsche Bank AG of Frankfurt.

Meanwhile, assets held steady at banks such as Chase Manhattan Corp. and J.P. Morgan & Co., according to the data. Both of those banks also reduced their exposure to foreign markets last year.

And both have been high-profile proponents of the capital management strategy, analysts said.

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