Superregional Banks Report Strong Profits
KeyCorp, 1st Bank System Up 40%
A handful of superregional banks reported strong third-quarter earnings on Wednesday, unimpeded by the burden of bad real estate debt and the distractions of mergers that plague their money-center competitors.
The results added evidence that the recession is ending in many parts of the country, analysts said.
In Minneapolis, First Bank System Inc. saw earnings jump by 40%, while Norwest Corp. reported a 22.2% gain. KeyCorp, in Albany, N.Y., also reported a 40% surge.
Earnings of CoreStates Financial Corp., based in Philadelphia, fell 3% from the level in the year-earlier period, but the company impressed analysts by reducing nonperforming assets for the first time since early 1990. Only Rhode Island's Fleet/Norstar reported a big decline - almost 71%, reflecting costs related to its purchase of the failed Bank of New England.
Norwest shares rose 62.5 cents Wednesday, to $33.50. KeyCorp stock gained 50 cents, to $40.50, while CoreStates was off 12.5 cents at $46.375. Fleet stock was unchanged at $24.875, and First Bank System rose 50 cents, to $22.125. Almost all reported strong results from consumer banking and significant advances in fee-based income, reflecting a successful attempt to diversify from their traditional lending businesses.
"These banks - and other superregionals - are showing strength in bottom-line numbers and stabilization of credit quality," said Dennis Shea, an analyst for Morgan Stanley & Co. in New York.
If an industrywide trend toward higher net interest margins continues into 1992, Mr. Shea said, "superregionals will begin to boom."
CoreStates saw earnings dip 3% to $60.6 million, larger because of a higher loan loss provision. The company set aside $45 million in the third quarter, against $39.5 million a year earlier.
Philadelphia-based CoreStates, which has been plotting aggressive expansion plans, also charged off $59 million, meaning that its loan-loss reserve fell at a time when most banks are building the reserves.
"It was a strong quarter," said Nancy Bush, an analyst for Brown Brothers Harriman in New York, "but I'd like to see them fully restore their sterling credit quality image."
Chairman Terrence A. Larsen said in a prepared statement that he was encouraged by the decline in nonperformers, but remains "concerned about the continuing weakness in the economy and continuing deterioration in real estate values."
Revenues at CoreStates, which has $22.8 billion in assets, continued strong in several areas. Income from fee-based services businesses grew 23% to $124.5 million. The service businesses also helped the company boost interest income as a result of strong compensating balances - large noninterest-bearing deposits that corporate customers place in banks in return for recordkeeping and other services. Net interest margin was a stellar 5.71%, up 27 basis points since the bank's second quarter.
KeyCorp's profit of $52.1 million came in large part from its acquisition of part of Goldome, the failed Buffalo savings bank, in June.
The bank company's mortgage banking income more than doubled from the second quarter to $17.4 million as a result of the purchase of Goldome Realty Credit, the bank said. In the third quarter of last year, Key booked just $3.8 million in mortgage banking profits.
Declining interest rates allowed KeyCorp to borrow at lower rates than it lends, resulting in a wide net interest margin of 4.67%.
The Goldome acquisition also figured in a 6.5% decline in KeyCorp's assets, to $24.4 billion. The company has been unloading thin-margin assets, a trend that it said would continue in the fourth quarter so as to maintain its strong capital ratios. At the end of the third quarter, KeyCorp's Tier 1 capital was 7.43% of assets.
On the credit quality front, KeyCorp saw a modest 2% rise in nonperforming assets since the preceding quarter. Analysts said the small increase reflected a stabilization in credit quality at KeyCorp's problematic New York State branches.
Fleet previously predicted that third-quarter earnings would be hurt by consolidation costs relating to its purchase of the former Bank of New England. The company reported net income of $9 million, after $26 million of expenses related to the consolidation.
Nonperforming assets climbed $78 million, to $1.6 billion, resulting from $48 million of consumer and residential mortgage loans inherited from the Boston bank. Fleet said the remaining $30 million increase at other subsidiaries was "the smallest quarterly increase since the second quarter of 1989."
Widening net interest margins and declines in nonperforming assets fueled Norwest Corp.'s record-setting quarterly profit of $104.1 million, a 22.2% increase over the prior-year period.
Problem assets declined by 12.2% during the quarter to $417.3 million, or 2.1% of gross loans. The Minnesota company has earned $289.6 million in the first nine months, up 109%.
Norwest, which acquired United Banks of Colorado in April, said the overhaul of the Colorado unit was "proceeding better than anticipated." Some analysts had been concerned that the cleanup of United Banks portfolio might cost more than expected.
FIRST BANK SYSTEM
Minneapolis' other big bank, First Bank System, also reported a favorable rate of decline in nonperforming assets during its profitable third quarter. The company's earnings soared 40% to $50.2 million. Nonperforming loans and foreclosed real estate increased by 3.5%, to $363.5 million.