The Strong Get Stronger In New York
The third-quarter results reported by New York City's biggest banks in recent weeks revealed, like autumn in Central Park, some flourishing evergreens and one dramatic splotch of red.
It was another quarter in which the strong got stronger and most of the weak continued to suffer.
Unusually strong trading profits - punctuated by receipt of interest payments from Brazil - spurred J.P. Morgan & Co. and Bankers Trust New York Corp. to near-record highs. Citicorp, on the other hand, lost $885 million.
Morgan, the nation's fourth-largest bank company, saw earnings soar 79% from the 1990 quarter to $373 million, while Bankers Trust reported a solid 9% gain to $185 million.
Chemical Banking Corp. also showed surprisingly strong trading results - seven times its normal trading profits - accounting for more than half of its $132 million in net income.
Its merger partner, Manufacturers Hanover Corp., had sluggish profits of $77 million, level with those of the previous year's third quarter.
Republic New York Corp. continued its exceptional record by reporting a 6.2% gain to $58 million. Bank of New York Co. - though down 17% to $58.8 million - impressed investors with a decline in nonperforming loans and a reduction in its portfolio of foreclosed commercial real estate and risky highly leveraged loans.
But the euphoria was tempered by Citicorp's loss and Chase Manhattan Corp.'s acknowledgment that high levels of nonperforming loans may continue to grow for the next two quarters. Chase also said that no improvement is in sight for its $9 billion commercial real estate portfolio.
Nevertheless, Chase recorded a gain of $136 million, rebounding from a $623 million loss from the year-earlier period, when it took a massive restructuring hit.
As a rule, provisions for sour real estate loans remained high at most banks, while loan demand continued weak and consumer deliquencies showed signs of flattening but not improving.
"There seemed to be a slowdown in the worsening," said James Rosenberg, an analyst at Shearson Lehman Brothers Inc. "But it's too soon to say we've turned the corner."
Reports in recent weeks of backsliding by the economy also increased concern that consumer loan deliquencies may rise again.
The single positive trend evident at almost all banks was stronger control over expenses. With few opportunities for increasing lines of revenue, banks have no choice but to ruthlessly cut overhead, analysts said.
Lofty Trading Profits
Trading profits at Morgan and Bankers Trust - from bonds, foreign exchange, and derivative instruments - were the second highest on record at both banks. Morgan's $396 million of trading gains outpaced its quarterly profit, as did Bankers Trust's $323 million of trading results.
Some analysts expect both banks to increase their dividend by 9% to 12% in the fourth quarter.
Retail-oriented Republic reported higher than expected earnings that were spurred by wide interest margins as well as a small gain on loan sales. It also announced a 7.1% dividend increase as a well as a three-for-two stock split.
Declining interest rates also helped other banks. The Federal Reserve lowered the discount rate once and the federal funds twice during the quarter, permitting banks to widen the gap between their borrowing and lending costs.
Payments from Brazil
Brazil's decision to begin paying down back interest added $154 million to Citicorp's results, $45 million for Chase, $18 million for Bankers Trust, and $17 million for Morgan.
The bad times, nevertheless, continue at most of the big banks with big retail networks. Of those with the biggest troubles, analysts are most optimistic about Bank of New York, which is generally believed to be poised for a solid 1992.
Reversing the trend at most of its competitors, the third quarter brought a second straight drop in nonperforming loans.
"I think the outlook there is terrific," said Bruce Herring, a portfolio manager at Fidelity Investments, the largest institutional holder of Bank of New York's stock.
A Vote of Confidence
The mutual fund company recently bought additional shares, Mr. Herring said, but he would not reveal how many.
While analysts applaud Chemical's strong quarterly results, they are worried that top executives are not making the tough decisions that will be necessary to achieve the $650 million in annual savings projected for the Chemical-Hanover merger.
"I was just out West seeing some of our clients, and you can cut the skepticism about the [merged company's upcoming stock offering] with a knife," said James McDermott Jr., president of Keefe, Bruyette & Woods Inc.
The outlook is, if anything, even darker for Citicorp and Chase. Some optimists believe that Citicorp's restructuring moves will position it to return to profitability.
Vulnerable to Downturn
But even they worry over the company's low loan-loss reserve, which makes it particularly vulnerable to a further economic downturn.
Chase may also need to take another big restructuring charge, analysts said, since its revenues remain flat and its reserves enemic.
The company said that it believes it can avoid a new charge by keeping expenses flat in 1992. [Tabular Data Omitted]