CHICAGO - The captains of Midwest banking foresee a toughening environment this year, but they say they are up to the challenge.
However, a modest profitability slide also may be in the offing.
In interviews with the American Banker, top officers of six major Midwest institutions said their banks are entering 1995 with tremendous momentum. At the same time, the bankers said they are bracing for further interest rate hikes, margin compression, and an eventual slowing of loan growth.
The upshot is that although these bankers expect a strong economy and strong results this year, they generally acknowledge they are entering an era where there will be less room for error.
For some Midwest banking companies, all this could translate into nothing more than a very mild retreat from the robust results of 1994.
But it could be that the seeds of the next banking shakeout will be sown this year. As screws tighten, executives say, so will performance divergence between stronger and weaker players.
"I think we are entering an era of substantial performance differentiation," said John Grundhofer, chairman and chief executive of Minneapolis-based First Bank System. The banking companies that don't keep pace in 1995, Mr. Grundhofer said, "will come under renewed pressure to seek merger partners."
To be sure, no one is anticipating real trouble, at least not anytime soon.
For one thing, bankers say, the economy seems to be humming along nicely. That has positive implications for loan demand, and for credit quality.
"I am very encouraged about the Midwest economy," said Andrew Craig 3d, chairman and chief executive of Boatmen's Bancshares Inc., St. Louis. "Unemployment levels are at historic lows, and the attitude of the consumer is one of confidence."
Additionally, Midwest banks are tackling the new year in generally excellent condition, said Roger Fitzsimonds, chairman and chief executive of Firstar Corp., Milwaukee. Fortified by "very strong" capital, loss reserves and credit quality, Midwest banks "have the underpinnings to support growth," Mr. Fitzsimonds said.
Midwest banks also stand to benefit along with the rest of the U.S. banking industry from potential changes in federal laws and regulations, and from a lowering of deposit insurance costs, said Eugene A. Miller, chairman and chief executive of Comerica Inc., Detroit.
Mr. Miller said he is optimistic the Republican-led Congress will revisit proposals to loosen or even abolish constraints imposed by the Glass-Steagall Act, along with proposals to streamline regulatory agencies.
Additionally, Mr. Miller said, the fall 1995 phase-in of last year's interstate banking legislation "could make it easy for us to export key strengths to attractive new markets," enhancing prospects for growth and diversification.
At the same time, Midwest bankers are anticipating a bit of a slowdown later this year.
"We believe the Federal Reserve System will continue to raise rates so long as it sees inflation," said Leo F. Mullin, president and chief operating officer of First Chicago Corp.
"Rising rates will tend to slow the economy, so loan growth will abate somewhat," said Mr. Mullin, who added that credit quality "will be a somewhat more difficult" issue in 1995.
A further banking industry concern is the net interest margin, said David A. Daberko, president and chief operating officer of Cleveland-based National City Corp.
"Loan competition is the strongest I've seen in five years," said Mr. Daberko. "And there's a serious question about how fast deposit interest rates might rise."
Although several executives reiterated the view that Wall Street has gone overboard in driving down bank stocks, most seem resigned to a prolongation of depressed trading values. In turn, there is a view that the pace of mergers and acquisitions will remain somewhat subdued.
Against this backdrop, Midwest bankers enumerated some common priorities for 1995:
* Consolidation - Slow merger market notwithstanding, a number of banks are focused on completing major transactions struck last year.
Mr. Craig of Boatmen's, for example, said he is intent on absorbing the $3.5 billion-asset Worthen Banking Corp., Little Rock. Mr. Grundhofer of First Bank has his hands full with the newly acquired Metropolitan Financial Corp., an $8 billion-asset thrift. And Firstar's Mr. Fitzsimonds wants to get his arms around the $1.8 billion-asset First Colonial Bankshares Corp., Chicago.
"For us, 1995 will be a year of assimilation," said Mr. Fitzsimonds.
* Efficiency - In the face of daunting competition and uncertainty about margins and fee income, bankers say extraordinary cost control is a necessity.
"The banks that can boost operating leverage will have an advantage in this kind of environment," said Mr. Grundhofer of First Bank.
* Risk management - Most bankers openly say risk-adjusted loan yields are deteriorating. That, along with prospects for continued loan growth, makes credit quality an issue of growing importance.
"We have to assure shareholders that we know how to underwrite credit," said Mr. Miller of Comerica.
Mr. Mullin of First Chicago held out the recent naming of David J. Vitale to the newly created post of senior risk management officer as evidence of his company's heightened resolve.
Portfolio management also will remain a sensitive risk issue, especially given the prospects for further rate hikes. "It will be a challenge to build core deposit funding needed to sustain loan growth," said Mr. Fitzsimonds.
* Product development, delivery and marketing - Anxious to build fee revenues, and under severe investor pressure to demonstrate growth independent of acquisitions, bankers say they are intent on building customer relationships.
For starters, that means further progress is necessary in providing new delivery mechanisms, such as telephone and personal computer banking, automated teller machines, and grocery store outlets.
"Banking is moving away from traditional branches," said Mr. Miller of Comerica.
And marketing has to be taken seriously, given its crucial role in internally generated growth. "We need to improve the product mix, call aggressively, and be responsive," said Mr. Daberko of National City.