Overcoming a host of challenges, the largest thrift institutions boosted their profitability in 1998-something their commercial banking counterparts were not, as a group, able to do.

An American Banker analysis of 1998 data showed that the average return on equity for the top 10 thrift holding companies grew to 13.98%, from 12.70%.

The average ROE for the top 10 bank holding companies fell to 13.51%, from 16.79%.

Though such comparisons can be complicated by differences in institution size and business mix, the trends are meaningful, analysts said. Big banks with international exposures suffered, but the assets of the largest thrifts are concentrated in healthy domestic markets.

And in a reversal of common perception, the top thrifts have gained a degree of ROE parity with banks and well exceeded aggregate profitability of the 100 largest thrifts, which in 1998 was 10.72%. (See tables on pages 6 and 7.)

"Undoubtedly, credit quality moved in opposite directions for banks and thrifts," said Donald Destino, an analyst at Jefferies & Co. in Los Angeles. "Big banks dealt with Asia and Central Europe and South America, whereas most of the big thrift assets are in California, where credit quality continues to get shinier."

In fact, roughly 40% of the assets of the top 10 thrift holding companies are in California. The $165.5 billion-asset Washington Mutual Inc., which last year bought $60 billion-asset H.F. Ahmanson & Co. of Irwindale, Calif., holds a large chunk of California thrift assets.

Washington Mutual chief financial officer William A. Longbrake said thrifts have found ways to gain from their industry's pain of the late 1980s and early 1990s.

"We are seeing the benefits of the shakeout" provoked by the thrift crisis, Mr. Longbrake said. "You have the strongest, most well-managed thrift companies as the survivors."

Mr. Destino said the performance of Seattle-based Washington Mutual may have skewed the top-10 averages. Wamu is bigger in assets than the next six thrift companies combined on the American Banker yearend ranking. It improved its return on assets by 36 basis points, to 0.96%; return on equity by 472 basis points, to 16.67%.

"Washington Mutual really began to pull together cost savings from some of its acquisitions in 1998," Mr. Destino said.

Though the bottom-line indicators were strong, "last year was one of the most difficult in the past few years," said Caren E. Mayer, an analyst at Banc of America Securities LLC. "We saw a lot of the big thrifts do much, much better than we expected."

Ironically, sensitivity to interest rates helped the thrift industry deal with the 1998 challenges. Because of their heavy dependence on rate- sensitive funding sources, such as certificates of deposit and Federal Home Loan Bank advances, thrifts benefited more from lower interest rates than banks, which tend to have a higher concentration of less elastic checking accounts, Ms. Mayer said.

Thrifts have become "very flexible and leery of shifts in interest rates," said Thomas O'Donnell, an analyst at Salomon Smith Barney. "This was not the first time thrifts went through a flat yield curve," he said. "They learned a lesson in the early 1990s, and they handled this latest challenge well."

On the lending side, thrifts also benefited from making fixed-rate mortgages and selling them at a gain, Mr. O'Donnell said.

Mr. Longbrake of Wamu said commercial banks' current risk profiles create "a potential for far greater earnings volatility" than thrifts.

Large thrifts have benefited from some asset diversification into commercial loans but without taking on substantial international lending or hedge fund risks. Because of those factors, plus efficiencies, Mr. Longbrake said, "although it was a challenging year, it wasn't one that had terribly adverse affects on thrifts' income."

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