First in a Series

Amid a buoyant economy, a stock market that won't quit, and record bank profits, public confidence in the banking industry has climbed to a new peak.

In the annual consumer survey done for American Banker by the Gallup Organization, 85% rated the U.S. banking and financial system healthy, while only 11% viewed it as unhealthy. (The rest were undecided.)

The spread widened from the previous year's 78%-16%, which had been the best since the survey series began in 1984.

When asked whether they had at least some confidence in the safety and security of the banking and financial system, 90% said yes, up from 84% a year earlier.

The survey was done by telephone from Oct. 10 to Nov. 6, straddling the stock market mini-crash of Oct. 27. But that did not seem to matter. The American Banker results have roughly paralleled the Conference Board's consumer confidence index, which at 128.3 in November was 4.9 points higher than in October.

"The public sees a lot of aggressive expansion in a very competitive industry, all in the midst of a booming economy," said Treasury Under Secretary John D. Hawke Jr.

Absorbed as they are in strategic and competitive issues, some bankers don't or can't stop to smell these roses.

"When everybody is doing pretty well, it's not much of an advantage," said Richard C. Hartnack, vice chairman at Union Bank of California.

People in that camp say this era of good feeling does not have much impact at the level of product marketing and cross-industry competition. But others say if banks are perceived as healthy, they have an excellent opportunity to deepen their customer relationships, particularly by selling more investment and insurance products.

"Perception is an important part of the consumer financial services business," said Donald L. Boudreau, vice chairman of Chase Manhattan Corp. "With this level of confidence, banks are extremely well positioned to cross-market."

Chase has 25 million customers who buy only one product, mostly credit cards. Mr. Boudreau said the nation's largest bank "plans to use this confidence and technology to turn those into multiproduct relationships."

Frederick J. Gronbacher, executive vice president of consumer banking at PNC Bank Corp., said it is reassuring that vast changes in the way banks do business, such as selling nontraditional products by phone, have not eroded consumer confidence.

"It is important that new products and techniques have not in any way damaged our image," he said.

But others warned against reading too much into the data from a nationwide sampling of 1,001 households. The major results had a margin of error of plus or minus three percentage points, meaning the improvements in perceived health and confidence were statistically significant.

"This is just a sign of good times," said William T. McConnell, chairman of Park National Corp., Newark, Ohio, and president of the American Bankers Association. "I'm afraid bankers will read this and say, 'Hey, the people are really with us.' I don't think that's the case at all."

Craig J. Kelly, group executive vice president at Crestar Financial Corp., Richmond, Va., agreed: "This doesn't take any of the heat off. It still comes back to, 'Are we delivering value to the customer on an every day basis?' Bankers can't relax."

Still, the positive numbers impress policymakers in Washington.

"In an international setting in which the banking systems of many countries are hallmarked by imprudent regulation and conflicts of interest, it is impressive that the U.S. banking system is rightfully understood by so many to be strong, solid, and able to provide the reserves needed for the American economy to prosper," said Rep. James A. Leach, R-Iowa.

Like Rep. Leach, who is chairman of the House Banking Committee, Mr. Hawke at the Treasury spent much of 1997 pressing for financial reform. He said the consumer attitudes "certainly create a very hospitable environment for banks" to win new product and service powers.

When apprised of the survey findings, more than a few observers pointed out that financial consumers' confidence in the industry had hit a previous cyclical peak in 1988, just before the thrift crisis and a credit crunch gripping the economy.

Some wondered whether, as in 1988, this year's stellar showing presages a decline.

"You could see some slippage in these numbers," said Paul L. Kasriel, chief domestic economist at Northern Trust Co. in Chicago. "There is no guarantee that this confidence will be warranted going forward."

"We're seeing banks make deals like those they made in the late 1980s," said John B. Ward, president of First American Bank in Elk Grove, Ill. "If we're at the peak of consumer confidence, we're probably at the peak of lender confidence."

Among the hazards, Mr. Kasriel said, is the year-2000 computer problem, which could eat into corporate profits as would government requirements to reduce the emissions causing global warming.

"I would not be surprised to see a downturn in these numbers next year for reasons that have nothing to do with the U.S. banking system," said industry consultant Bert Ely of Alexandria, Va. "We're going to see a lot of bad press on Southeast Asia's problems next year, and I would not be surprised if it knocks down these numbers."

Predicting continued high returns on equity, James J. McDermott, president of Keefe, Bruyette & Woods Inc. in New York, disagreed with the naysayers.

"You've got to take a look at the redefined position of this industry," Mr. McDermott said. Banks have much more capital and are less reliant on spread income than in 1988. "It's a newly designed system that's better positioned to weather problems," he said.

Nicholas J. Ketcha Jr., director of the Federal Deposit Insurance Corp.'s division of supervision, added that consolidation has weeded out many weak bank managements.

"Hopefully we're going into the future a lot stronger than we did in the past-both bankers and supervisors," he said.

There were gradations and demographic differences in the way the Gallup survey respondents answered the health and confidence questions.

The number of people who rated the banking and financial system "very healthy" climbed seven points this year, to 25%, while the "fairly healthy" score held steady at 60%.

Those with "a great deal of confidence" in the system's safety and security rose to 37%, from 30%. That was the highest score since 1986 when it hit 38%, and was more than double the ratings of the early 1990s.

The number of people expressing "some confidence" dropped one point, to 53%.

The total with some or a great deal of confidence, now 90%, is still short of the 94% of 1987.

The number of people who have little or no confidence in the banking and financial system hit a new low, dropping five points to 9%. The previous record of 12% was reached in both 1986 and 1988.

Banking should benefit when the stock market turns down, Mr. Gronbacher at PNC said.

"This wonderful investment market is not going to last forever," he said. "As people look for places to stuff away the great gains they made, you would assume the banking industry becomes a wonderful alternative."

Favorable perceptions moved up with income and education.

For example, 91% of respondents who went past college said the banking and financial system is healthy, and 96% had at least some confidence in the system's safety. By contrast, just 80% of respondents with high school diplomas or less considered the system healthy, and 86% were confident about its safety.

Among people making more than $75,000 a year, 93% said the system is healthy, and 95% were confident it is safe. But of the people making less than $20,000 a year, only 82% said it was healthy and were confident it was safe.

Confidence went down with age, by contrast.

Scores on the health question ranged from 90% among people 45 to 54 down to 81% in the "over 64" crowd.

The 45-to-54 group also had the highest confidence score, 92%, but the variance was smaller. Respondents older than 64 again came in lowest, at 86%.

Mr. Kasriel of Northern Trust said aging baby boomers will tell the tale in the future.

"People are using more and more financial services as they prepare for their golden years," he said. "In the 1980s, real estate was the hot topic at cocktail parties. Now it's mutual funds."

Regionally, people in the North Central states gave the highest health and confidence ratings-87% and 92%, respectively.

"Either we're more naive or we're not as jaundiced as either of the coasts," said Mr. McConnell, the ABA president. "People in this part of the country are more inclined to trust banks and politicians."

The West had the lowest regional confidence score, 88%. The lowest health score was in the Northeast, at 80%. This region also had the widest gap-nine points-between health and confidence. (Confidence on the soundness question was higher than the "health" score in almost all statistical segments.)

Mr. Hartnack of Union Bank in Los Angeles said financial consumers in the middle of the country are happier because they have not been hard hit by mergers. "The Northeast and West-that's where the acquisition activity has been," he said.

"The geographical difference I attribute to how long it has been since there were banking problems in the region," said Mr. Ely. They have hit most recently in the Northeast and West-though the prolonged economic expansion may be causing them to fade in many people's memory.

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