Profit Momentum Petered Out In a Disappointing 3d Quarter

Down, down, down -- that is one way to describe the banking industry's disappointing profitability in the third quarter.

Brought down in part by weak performance at Citicorp, money-center banks on average suffered a 28% decline in return on assets and a 35% drop in return on equity from the second quarter.

The average money-center ROA was 0.42% in the third quarter, and ROE was 7.43%.

Large Banks Did Better

Superregional and large regional banks -- the other categories covered in the profitability tables that begin on page 14 -- fared somewhat better. The average return on equity for superregional banks fell 30%, to 3.66%. At large regionals, the fall wasn't as hard -- just under 20% -- and the average was higher, at 5.42%, according to the latest American Banker survey.

Experts cited several reasons for the faltering performance. Banks are not making new loans, but they are not cutting assets either. They are exchanging yield for the safety of U.S. government obligations. Costs continued to grow at a double-digit pace. Meanwhile, nonperforming assets have not declined.

Coming on the heels of a promising second quarter, the setbacks were especially disappointing. But like tea leaves, even declining financial performance can sometimes yield several interpretations.

Bankers and analysts are divided on whether third-quarter results are a cause for dismay or for renewed confidence that the last bit of bad news has been squeezed out -- leaving the coast clear for a turnaround.

"The determinant of the profitability of the banks is going to be the credit picture, and I would not predict that the industry has turned the corner on nonperforming assets," said Joseph G. Sponholz, chief financial officer of Chemical Banking Corp.

Nonperformers in Check

Concern about few loans and falling profits partially masked good news about nonperforming assets, which remained generally flat in the third quarter -- a sign hailed by some observers as evidence that real estate problems are under control at last.

But some analysts see nothing encouraging about the recent check on the growth of nonperformers. Charles Peabody, an analyst with Kidder, Peabody & Co., said the reason big banks held nonperforming assets in check is that some of those assets were charged off, particularly bad loans to Brazil. Those writeoffs have offset the actual rise in nonperforming assets from bad domestic loans.

Nevertheless, investors are back. The premium investors placed on stocks -- the ratio of market to book value -- rose an average of more than 10% for money-centers, superregionals, and large regional banking companies.

The biggest institutional investors express confidence in the industry. They cite the benefits of consolidations to bank earnings in the long run and the apparent lack of growth in bad loans.

Citicorp Casts a Pall

Huge losses at Citicorp have offset the high performance of some money-centers, perennial highfliers Bankers Trust New York Corp., J.P. Morgan & Co., and a resurgent Chemical.

Among money-center banks, Bankers Trust and J.P. Morgan continued to outperform the industry. Not coincidentally, neither bank has more than 30% of its assets in loans. Both banks had an ROE exceeding 20% in the second quarter, the only two big banks above this level.

Both boosted that ratio in the third quarter. Morgan had the biggest percentage growth in ROE of any bank, adding nearly three percentage points to 22.91%.

Set aside these two high performers and money-center banks rose only slightly in investors' eyes, as measured by their ratios of market to book value.

Big regionals and superregionals, however, have given analysts cause for encouragement.

"Superregional banks showed a stability in earnings, which is good because we are either in a recession or coming out of one," said Dennis Shea, an analyst with Morgan Stanley & Co. "If the banks can just stabilize here, and I think they are doing that, it is good news for them."

Big regional banks have not been expanding their loan portfolios for the past two years. At the same time, they have been charging off 1.5% of those loans a year. By now, most of the asset problems are under control. Mr. Shea said he sees no new credit problems arising, as banks have increased their loan reserves substantially. Even if a bank has an increase in nonperforming assets now, it is typically because of one credit gone bad, not whole classes of loans.

"Regional banks have turned the corner on nonperforming loans, outside California," said Mark Lynch, an analyst with Bear, Stearns & Co.

Led by Banc One Corp., which posted an ROA of 1.70% -- the highest among the 58 banks surveyed -- superregionals held their ground on this measure of performance. But they slipped on average ROE, with five of the 25 banks in this category recording a negative number.

But big regionals are not out of trouble. The growth in earnings is being outpaced by a growth in expenses. According to Bear Stearns, at the 20 biggest superregional banks earnings grew 8% during the third quarter, but expenses grew 10%.

Investors, too, have frowned on some superregionals, particularly those involved with either costly or troublesome acquisitions. The premium the market puts on the stocks of NCNB Corp. and First of America Bank Corp. declined. Their ratios of market to book value declined as well.

PHOTO : The Runners Stumble

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