By most outward signs, the banking industry seems to be on a roll. Profit margins are near record highs. Credit-quality problems have leveled off. And the benefits of cost-cutting and mergers are starting to kick in.

Yet camouflaged by the recent spate of good news is a fundamental problem: The industry's revenue growth has come to a halt and is not expected to pick up significantly anytime soon.

Indeed, while the bottom line is looking better, the improvements is due in good measure to factors that can't be sustained, like unusually wide net interest margins.

Therefore, to maintain and increase profits, banks will have to find ways to build the top line - that is, gross revenues. Many leading bankers and consultants thing that will be the overriding concern at big institutions over the next few years. "This is the major issue CEOs face," says James McCormick, head of First Manhattan Consulting Group.

Failure Will Be Costly

For top managers, the stakes are high. While no one will be immune from revenue pressures, obviously some will fare better than others.

Those who pick successful strategies for revenue growth stand a better chance of thriving well into the '90s. Those who don't, face the prospect of massive expense cutting and, ultimately, extinction (read: loss of jobs) by being forced into mergers.

Behind the problem is a big downturn in lending. Commercial loans on the books of banks fell a total of 7% in 1990 and 1991. And consumer loans, after double-digit annual growth in the late 1980s, climbed just 6% last year.

Some of the downturn, of course, is due to the recession. But experts say that even an economic rebound will not make up for a fundamental shift away from bank lending.

This shift, caused by a new-found reluctance by borrowers to take on debt, tougher regulation, and increased competition from nonbanks, actually started several years ago but was masked by the real estate lending binge, they say.

As a result, lending -- and therefore revenues -- are expected to grow meagerly, at best, for the next several years. And when inflation is thrown into the mix, the industry faces the chilling possibility of no real growth in the near future.

"We think the industry will have low growth or no growth," says Terrence Larsen, chief executive of CoreStates Financial Corp., Philadelphia.

His counterpart at Mellon Bank Corp., Frank v. Cahouet, agrees. "Revenue growth will be modest," he says. "It will exceed the inflation rate, but it will be modest in real terms."

Ways to Enhance Revenue

The upshot: CEOs are -- or should be -- looking at a number of ways to boost revenues:

* Niche loan areas: Some banks are trying to expand specialized lines of lending, like mortgages and credit cards.

* Fee income: Developing a steady steam of fee-based revenues has become the industry's Holy Grail. High on everyone's list are mutual funds and money management. But some fee-based businesses, like trust banking, require costly investments in technology and are not likely to be a solution for latecomers.

* Acquisitions: Banks can buy revenue growth by picking off institutions that have strong franchises. But to pursue this path aggressively, as Banc One Corp. does, requires a lofty stock price.

* Loan standards: There are two ways to go. Some banks figure to tighten standards, because there won't be enough revenue growth to cover mistakes. But others will be sorely tempted to loosen standards -- as occurred with realty lending -- in order to boost the top line, and worry about loan quality later.

Cost Cuts Will Be Needed

In any event, most banks will have to step up expense cutting in the face of slack revenue growth.

Some institutions have already cut heavily, but the industry as a whole has made little progress in overhead reduction. For the past five years, 65 cents of every dollar of revenue was eaten up by expenses. And while revenue growth was turning negative in the late 1980s, noninterest expense continued to climb steadily.

The need for cost cutting, has been well publicized for years, but Mr. McCormick of First Manhattan estimates that fewer than 20% of chief executives are aware of the profound shift in lending that has occurred.

He says that banks waiting for lending to revive are ignoring the fact that loan growth has been waning for five years -- in other words, even before the recession.

Collapse of a Key Sector

Real estate lending was the engine of growth for many banks in the 1980s, jumping 16% in 1988, 5% in 1989, and 9% in 1990. The real estate collapse has ended that.

"Real-estate-related loans kept banks' revenue growth above the rate of inflation," says Mr. McCormick. "Core lending is actually shrinking, after adjustment for inflation."

Consumer loans, which account for 44% of industry lending, are also losing steam, thanks in part to the real estate down-turn.

"Consumer loans grew like a weed in the 1980s," says John Medlin, chief executive of Wachovia Corp. "These have all come down to being a less exciting business."

A Hesitancy to Borrow

Consumer lending usually leads the way out of a recession. But consumers, who are heavily in debt, may not be ready to borrow for quite a while. Many bankers forecast that commercial loans won't pick up for 18 months.

Against that backdrop, the growth outlook is bleak. Loan portfolios will be flat this year, up 3% next year, and up 5% in 1994, according to projections by Francis X. Suozzo, an analyst with S. G. Warburg & Co.

Meanwhile, the gross domestic product and inflation are expected to grow annually at a combined 5% to 6%, the Office of Management and Budget predicts.

Wall Street recently showed some skittishness about banks' revenue prospects, driving down stock prices. "The market is concerned about loan growth," said Alison Deans, an analyst with Smith Barney, Harris Upham & Co. "Companies that have other sources of earnings that can generate healthy earnings growth will do better."

Seeking Out Niches

Of course, some banks will be able to exploit pockets of opportunity in the lending markets. Richard M. Kovacevich, president of Norwest Corp., believes banks can become more aggressive in mortgage lending, for example.

Lenders will also be under pressure to price their credits to reflect risk adequately, something they haven't done well in the past.

But some may go the other way. "My tendency is to believe that banks will find a way to lend money," says Mr. Kovacevich. "To do that, they may reduce underwriting standards so they have more customers qualified to borrow."

The Drive to Boost Fees

A likely target for many is increased fee income, whether from the sale of mutual funds, from transaction processing businesses, or from higher account charges for consumers.

An added appeal: Banks that have a sizable source of steady fee income are rewarded on Wall Street with higher stock valuations.

Many banks are expected to turn to higher charges on consumer accounts, which now contribute an estimate 10% of noninterest revenues. Wells Fargo & Co., for example, has told analysts that it may unbundle the prices it charges for deposit services, with an eye toward boosting income.

Some banks believe there is still plenty of growth available in older services that rely heavily on computers:

* Wachovia plans to boost growth in treasury services, including cash management, by using more computer-to-computer services with corporate clients.

* Bank of New York Co. has told investors that securities processing will be one of its biggest sources of profit growth.

* State Street Boston Corp. and Northern Trust Corp. are likely to see good growth in trust income.

Others are turning to newer products:

* Money-center banks that trade in fast-growing derivative products like swaps and options figure to see solid growth in fee income.

* CoreStates, which already derives 40% of its revenue from processing automated-teller-machine transactions and other fee services, recently entered into a joint processing business for debit cards with Banc One and PNC Financial Corp.

* Many are targeting investment services. "There was a lot of wealth created in the 1980s," says Mr. Medlin of Wachovia. "People could get a good rate with a Treasury bill or a certificate of deposit in the 1980s. Now they can't. That means there's a lot more opportunity for money management for everybody."

Bankers shouldn't put too much hope on fees as their salvation, however.

It's true that the industry has made strides in boosting fee revenues: Noninterest income accounted for 17% of bank revenues last year, up from 7% in 1981, according to date from the Federal Deposit Insurance Corp.

But the annual rate of growth has hovered around 12%, indicating that fees alone won't be enough for most.

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