OCC: Interest Income Will Continue to Fall

The Office of the Comptroller of the Currency on Tuesday warned banks, particularly small ones, that their interest income will continue shrinking over the next several quarters.

Commercial banks suffered an 18-basis-point decline in the ratio of net interest income to assets in the second quarter of 1999, compared with the same period two years earlier, according to the agency's latest quarterly "Condition of the Banking Industry" report. It fell to 3.51% for the three months ended June 30, versus 3.69% in the second quarter of 1997.

The fall was even steeper during the same period for banks with less than $100 million of assets. Their ratios of net interest income to assets tumbled 28 basis points, to 4.08%, in the second quarter of 1999, compared with 4.36% in the second quarter of 1997.

Most commercial banks found other sources of profits to compensate, the report said. The industry increased its ratio of noninterest income to assets by 40 basis points, to 2.54%, in the second quarter of 1999, from 2.14% two years earlier.

But for banks under $100 million of assets, that ratio declined by two basis points, to 1.25%, from 1.27% over the same two-year period. Larger banks are expected to continue finding noninterest sources of income to offset the decline, said Nancy Wentzler, the OCC's director of economic analysis. Worried that small banks will have fewer alternatives and embark on overly risky activities, officials urged these institutions to take advantage of their solid local customer bases.

"Smaller banks may find their opportunities -- geographic or product -- to be more limited," Ms. Wentzler said, "which means that the burden to manage well in their market niche will increase."

-- Rob Garver