bank holding companies. The median ratio of noninterest expense per dollar of revenue for the group declined from 62.18% in 1993 to 59.56% for the first nine months of 1995, according to American Banker calculations.

The top 10 banks in efficiency include perennially cost-conscious and high-performing institutions - Fifth Third Bancorp, Bank of New York Co., Wachovia Corp., and Wells Fargo & Co.

But the ranking also shows dramatic leaps in efficiency among banks that have undergone high-profile restructurings in recent years. Among them are First Bank System Inc., CoreStates Financial Corp., HSBC Americas Inc., and U.S. Bancorp.

Clearly, the numbers are getting better. I don't think there is any question about that, said Michael K. Diana, a Bear, Stearns & Co. analyst.

But other analysts question whether the industry's focus on cutting costs has resulted in significant improvements in efficiency.

A lot of banks have done a lot of work, said David Berry, director of research at Keefe, Bruyette & Woods Inc. in New York. But it seems that for every bank that has made a lot of headway, there are some backsliders in the group. So in the aggregate, the medians don't change a lot.

For example, the efficiency ratio at Chase Manhattan Corp. jumped from 63.94% in 1993 to 68.50% for the first three quarters of 1995, despite a major reengineering effort begun in May. The bank later agreed to merge with Chemical Banking Corp.

Mr. Berry also said the median efficiency ratio for the banks tracked by his firm - a slightly larger group than American Banker's universe - has remained flat for two years.

Paul Allen, chairman of Aston Limited Partners, a New York consulting firm, said the overall improvement in the efficiency ratio for the biggest banks has largely come from the revenue side of the equation, not from broad expense reductions.

In many cases, any apparent improvement is a reflection of what's happened to the net interest margin, said Mr. Allen. If the unusually high spreads that banks have enjoyed is normalized, he added, the efficiency ratio is in essence flat for the group as a whole.

Nancy Bush, a Brown Brothers Harriman & Co. analyst, said, I agree that there is a supernormal margin component, but that's shrinking. But it also comprises real progress in the expense numbers. It's hard to say it's all one or all the other. It's some of both.

The disparity of views stems from the difficulty of applying what is itself a murky number across a large field of companies. The strength of the number as a comparative indicator of efficiency changes along with a bank's mix of business. State Street Boston Corp., of course, has long posted among the highest returns on equity in banking. But it's always near the bottom in efficiency because of the high cost of operating its processing businesses.

As Mr. Diana noted, There is so much 'noise' it is hard to measure it exactly.

Still, efforts of individual companies have yielded dramatic results, at least in the short term.

Two years ago, for example, Ernest C. Roessler, chief executive of CCB Financial Corp., told Management Strategies that while the Durham, N.C., bank's efficiency ratio of 66.11% was too high, it would decline substantially over the next year.

It did. For the first nine months of 1995, CCB posted an efficiency ratio of 54.92%, moving it up 43 places in the top 100 rankings, compared with 1994.

Mr. Roessler credits the improvement to an expense-reduction program, higher revenues, and merger-related benefits.

All three panned out, he said in a recent interview. Now we feel we are very competitive.

To reduce expenses and redesign processes, the $4.9 billion-asset bank hired the consulting firm BEI Golembe, an Atlanta-based subsidiary of Electronic Data Systems Corp.

We had tried to do it internally on a volunteer basis, recalled Mr. Roessler. That really had not materialized with a lot benefit or change in direction or focus.

The consultants, he said, brought structure and discipline to the process. The bank ultimately made 600 changes, many prompted by employees' suggestions. Among the steps taken were centralizing loan processing, simplifying tellers' jobs, and introducing telephone banking.

While Mr. Roessler sees other opportunities to cut costs, he said further reductions in the efficiency ratio will largely come from the revenue side of the equation.

How much further can the efficiency ratio drop?

The prospects are still very good to reduce that more, said Mr. Roessler. But he conceded it won't be as easy to get to the high- 40s.

Like CCB, U.S. Bancorp, Portland Ore., also reached its efficiency ratio goal ahead of schedule. As part of a reengineering launched in the spring of 1994, the bank said it would reduce the expense ratio to 59% in three years, a goal that has been reached more than a year ahead of schedule.

The effort reduced the head count by 25% and annual expenses by $195 million. Gerry B. Cameron, U.S. Bancorp's chief executive, said the improvement in efficiency - the ratio declined from 66.57% in 1994 to 58.43% for the first three quarters of last year - has been due to reduced costs, not increased revenue growth.

While the Oregon bank was at the top of some analysts' takeover lists, the restructuring, along with a higher stock price, enabled it to buy West One Bancorp, a $9.2 billion-asset institution based in Boise, Idaho.

But beyond merger-related expense reductions, Mr. Cameron doesn't see much more room to cut. We are much closer to where we need to be, he said.

So now U.S. Bancorp is looking for ways to increase revenue. I think that's always been my biggest concern - what happens to revenues, said Mr. Cameron. I think we were pretty lucky to hold the revenues at the level they were while we went through this downsizing.

The bank wants to boost its cross-selling ratio, in part through building mutual funds and annuities sales.

Toward that end U.S. Bancorp will roll out a system this year, called Integrated Client Access Network, that will, among other things, aid target-marketing efforts. The staff will use PCs to collect detailed customer profiles when accounts are opened.

It's a combination platform sales thing as well as a central information file . . . that really gives our people the capability of knowing what all of the products are, said Mr. Cameron.

Analysts agree that using systems to build revenue will continue to be critical to successful performance.

But predicting revenue streams is far from an exact science - which is why Wall Street remains so focused on operating expenses.

Costs are the only thing over which you have control, said Mr. Diana of Bear Stearns. You have no control over interest rates, you have no control over the economy, you have limited control over whether your customers borrow your money or not.

Mr. Allen, the consultant, said banks that have taken advantage of high spreads and big profits to restructure their banks will be better prepared when the business cycle changes for the worse.

Over the next two years, you are going to see a divergence of performance between two sets of banks, he said. The larger group is composed of banks that have been living off the spread, took much credit risk, and didn't begin early enough building loan-loss reserves. The underperformers are going to be spending their time as they were in 1990 to 1992 - fixing credit, he said.

Another group is banks that have taken this period of supernormal profits to prepare a new economic base, a new process base, for the future by restructuring, said Mr. Allen.

Ms. Bush, however, is skeptical that the efficiency gains posted by recently reengineered companies are sustainable.

What we're finding is that these big splashy consultant-led programs give you an initial improvement that then goes away, she said. I think the jury is very much out on whether the expense control continues, and whether there is any long-term revenue detriment in both CoreStates and Fleet Financial Group, which have undergone reengineering initiatives.

There is also the question of how low the expense ratio can go, especially when banks face shrinking margins and slower revenue growth.

Ms. Bush noted that a 60% ratio was considered respectable just two or three years ago. Now, a number in the mid-50s is considered good, with the very best banks approaching, and dipping into, the 40s.

The goal continues to get ratcheted down, she said.

Mr. Cameron of U.S. Bancorp said he wants to get the ratio at his bank to 55% or below.

But he cautioned, When you get down much further than that, what I'm afraid happens is that you get a tradeoff for service. And if your service slips, that's going to impact your revenue side.

Mr. Berry said it is impossible to posit an absolute bottom for a bank efficiency ratio. But he insisted, There is a ton of money to be saved in restructuring the banking industry and taking advantage of current technology.

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