A mixed bag of cost savings, acquisitions, divestitures, and lower credit losses boosted the 50 largest banks to greater profitability in 1997.

According to a survey by American Banker, the top 50 banks last year had an average return on equity of 17.68%, up from 16.6% in 1996. Average return on assets was 1.34%, 5 basis points better than in 1996.

The decline in credit losses was a welcome industry trend.

Although many analysts expect profit ratios to continue to increase, there had been mounting concern over consumer bankruptcies and loan losses.

The American Banker study found that the average for nonperforming assets to total loans and real estate obligations was 0.71% in 1997, down from 0.8% in 1996.

Analyst Anthony Davis of SBC Warburg Dillon Read said the profitability gains came from a variety of sources.

"There are a lot of themes here," Mr. Davis said. "Getting rid of unprofitable businesses works, excising expense costs through acquisitions works, making sure you're not giving away the bank with credit costs works."

Moreover, core earnings have been on the rise, largely because of better profitability analysis by banks and a greater dependence on fee-based businesses, Mr. Davis said. Banking companies have diversified their revenue streams and dramatically lowered their expense bases.

The top 50 banks as a group earned $41.8 billion in 1997, an 11.5% gain from 1996.

Included among the top 50 banks is a monoline credit card company, MBNA Corp. of Wilmington, Del., which topped all banks for return on assets and equity. MBNA earned 3.25% on assets and 35.56% on equity.

Among commercial banks, CoreStates Financial Corp., which has agreed to be acquired by First Union Corp. of Charlotte, N.C., had the highest return on equity, with a 24.18% ratio.

Bank of New York Co. had the highest return on assets, with 1.98%.

The survey does not exclude extraordinary items, such as restructuring charges, or the gains on sales of businesses and other one-time events. So 1997 net income at Citicorp was hurt by an $889 million charge in the third quarter to account for losses in its Asian operations. And 1996 assets at Chase were helped by its merger that year with Chemical Banking Corp.

On an operating basis, the big banks' 1997 earnings grew an average of 10% from the previous year, according to First Call Corp. Boston-based First Call's consensus estimates for 1998 predict 14% growth in 1998, however.

Last year "was a good year for banking, but not exceptional," said Charles L. Hill, director of research at First Call.

"Banks earnings are not sexy," agreed Michael Mayo, an analyst with Credit Suisse First Boston. "You had revenue growth that outpaced expense growth and you had banks reallocate excess capital."

Mr. Mayo said acquisitions, which have played a large part in the growth of many of the top 50 banks, have had mixed success. "More often than not mergers are working out," Mr. Mayo said. "The real test is how do they work five years from now."

The top 50 banks had $3.6 trillion of assets in 1997, an 11.2% gain. Those banks held 72% of all the banking and thrift assets in the nation.

Mergers have helped some banks leapfrog others in the rankings for total assets. The merger between Portland, Ore.-based U.S. Bancorp and Minneapolis-based First Bank System Inc. created the 15th-largest bank, with $71.2 billion of assets.

NationsBank Corp., which acquired Boatmen's Bancshares in 1997, moved from fifth- to third-largest bank in the nation. But that ranking became obsolete in January, when NationsBank became the second-biggest banking company with its purchase of Barnett Banks Inc.

Another banking company likely to move up this year is National City Corp. of Cleveland, which is buying America Bank Corp. After that deal is concluded, National City would become the country's 13th-largest banking company.

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