Overlooked in the hoopla over banks' stellar first-quarter earnings reports was an increase in net interest margins among superregionals.
For the first time since the end of 1994, superregionals' average margin increased from quarter to quarter, according to a Lehman Brothers report covering 21 banking companies.
The margin rose to 4.42% in the first quarter, up 5 basis points from the fourth. It was the biggest jump since a 7-basis-point surge in third quarter 1992.
"Banks are changing their business mix toward more consumer loans, and downsizing their lower-spread assets," said Michael Mayo, the regional bank analyst at Lehman Brothers who authored the report.
"Also, deposit pricing has been more favorable for banks, because a lot of the price-sensitive money has already left the system," he said.
In other words, interest rate shoppers have already departed.
The wider margins reflect steps banks have taken to improve the management of their balance sheets, said Sandra J. Flannigan, a bank analyst with Merrill Lynch & Co.
Banks are not only working down their investment portfolio "but also turning over their low-spread loans, such as single family mortgages," she said.
Charles Newman, chief financial officer of Barnett Banks Inc., said this month that the runoff in low-yielding mortgage loans had helped boost its margin 22 basis points, to 5.27%.
Several banks led the charge to healthier net interest margins - the difference between what a banks earns from lending and what is paid out for interest-bearing liabilities, like deposits and preferred equity.
PNC Bank Corp.'s margin surged 51 basis points to 3.73% in the first quarter, as the company continued its balance- sheet restructuring by building up higher-spread loans.
Similarly, Fleet Financial Group's margin rose 43 basis points, to 4.43%; KeyCorp's 17 basis points, to 4.70%; and First Chicago NBD Corp.'s 28 basis points, to 3.51%.
There were two notable exceptions to the improvement.
SunTrust Banks Inc.'s margin slipped 12 basis points, to 4.35%, largely because of the company's effort to attract new deposits through teaser rates.
And U.S. Bancorp.'s fell 36 basis points, to 5.19%, as it accelerated deposit growth to help fund asset expansion, said James Bradshaw, an analyst with Pacific Crest Securities in Portland, Ore.
Ms. Flannigan of Merrill Lynch cautioned against reading too much into the uptick in margins. Net interest income is a more reliable index of banks' health, she observed.
Because banks are reducing earning assets, she said, margins can fall while net interest income - the difference between what banks make on earning assets and their cost of funds - can rise.
But Mr. Mayo of Lehman Brothers said the increase in margins demonstrates that banks are being compensated for higher credit losses, a major concern for the industry.
The ability to offset credit losses is the primary factor in determining what a bank is worth, he added.