Banks in the United States are finally shaking off some of the gloom and doom of the last few years. Thanks to a slowly recovering economy and favorable interest rates, the industry is bouncing back from credit woes and anemic earnings.

In the last 12 months, banks made important strides in boosting profits and capital, while chipping away at bad loans.

"There has been a gradual . . . improvements in balance sheets and earnings streams," said James J. McDermott Jr., president of Keefe, Bruyette & Woods Inc., an investment bank specializing in banks and thrifts. "The industry is pointed away from trouble and toward safe harbor."

But the landscape is still littered with hazards.

Regulatory Threats

For starters, tougher regulation mandated by Congress is a looming threat. And even as lawmakers imposed strict new rules, they turned a deaf ear to the industry's appeals for expanded powers, such as the right to sell securities or add branches across state lines.

Then there are stiffer deposit insurance premiums that could offset much of the progress made in paring costs.

These added burdens threaten to hobble bank's ability to compete with such rivals as brokerage houses and finance companies.

On top of that, the cyclical recovery now taking place masks deep-seated structural problems.

Nonbank competition for consumer savings is stiffer than ever. And many bankers fear a long-term erosion of credit demand as consumers pare debt and businesses turn to other sources of financing.

"Loan demand is going to be very slow to recover," said John G. Medlin Jr., chairman and chief executive of Wachovia Corp.

Meanwhile, the long awaited consolidation trend has picked up speed with a new wave of mergers. Bankers expect a heavy pace of dealmaking.

Last summer, a stunning series of megamerger's riveted the industry's attention, capped by Bank America Corp.'s combination with its California rival Security Pacific Corp. This was the largest merger in U.S. banking history.

The giant deals paved the way for a wave of smaller transactions in which well-heeled regional banking companies snapped up midsized independents.

Nationwide Banking Trend

"We are slowly, but for the first time clearly, moving toward nationwide banking," said banking lawyer H. Rodgin Cohen of Sullivan & Cromwell.

The companies that are making the most progress in building far-flung franchises are those whose sheer bulk gives them power, such a BankAmerica and North Carolina-based NationsBank Corp., or those whose shares sell at lofty premiums, providing the currency to make acquisitions.

In that category are such superregionals as Columbus, Ohio-based Banc One Corp. and Albany, N.Y.-based Key Corp. Banc One's strong stock price allowed it to pay a stunning $1.2 billion, or about 2.2 times book value, for $11 billion-asset Valley National Corp., Phoenix, in the largest deal announced during the first half of 1992.

"The stock market is making the distinction between winners and losers," noted Waino H. Pihl, head of the banking practice at Andersen Consulting.

Profits Bounce Back

Looking backward, U.S. bankers can savor an impressive earnings rebound beginning late last year. And that helped spur a bull market in bank stock prices.

Banks netted a record $7.6 billion in the first quarter of 1992, up 36% from the same period the year before, according to the Federal Deposit Insurance Corp. Return on assets rose to 0.88% in the first quarter, from 0.66% in the first quarter of 1991.

At the same time, U.S. banks rapidly build their capital cushions as tougher international standards were phased in.

The receptive equity market helped. In 1991 U.S. banks issued about $7.5 billion in common and preferred stock, more than four times the 1990 total, according to Securities Data Corp.

Asset Woes Under Control

The brighter profit picture stemmed mainly from lower loan-loss provisions, wider interest margins, and better control of costs.

The sputtering economic upturn has not boosted loan demand; volume remains weak. However, the halting character of the recovery kept interest rates at the lowest levels in decades, letting banks push down rates paid to depositors and keep margins hefty.

Meanwhile, credit quality stabilized as the economy slowly healed, a most encouraging sign after a punishing bout of loan problems.

The collapse of the U.S. commercial real estate market at the beginning of the decade touched off a sharp rise in loan problems, pushing nonperforming assets to dangerous levels.

But in 1991, nonperforming loans and foreclosed real estate leveled off, according to a Keefe, Bruyette & Woods survey of large and mid-sized banks. At the same time, banks benefited from the heavy loss provisions they had made earlier in the cycle.

Bottom-Line Benefits

Spurred by regulators, "banks took action sooner and somewhat more aggressively" to build reserves than in previous downturns, noted Robert T. Parry, president of the Federal Reserve Bank of San Francisco.

As a result, when loan portfolios started to recover, banks were able make dramatically lower provisions, boosting their bottom lines.

Nevertheless, the nationwide improvement concealed striking regional differences. Even as such trouble spots as New England, Arizona, and Texas showed signs of life, California, especially the economically depressed Los Angeles area, emerged as U.S. banking's weakest link.

Despite the recovery taking shape in most regions, loan problems will weigh down banks for years to come. And examiners will continue their tough stance on credit.

Spartan Cost Controls

"Although there is some improvement, the focus [on credit quality] is still warranted," stressed Mr. Parry.

The pressure on banks has spurred them to step up efforts to rein in costs. Some banks are now setting an unusually aggressive goal of trimming expenses to less than 50% of revenues. Until recently, 60% was considered standard of excellence.

"What I see now in banking is a passion about cost control that I have not seen before," said Mr. Medlin of Wachovia.

But the emphasis on costs is taking a heavy toll on the bank job market, including middle management. Last year, the top 25 U.S. banks slashed about 44,000 jobs, more than 6% of their total work force, according to an American Banker survey. Estimates of the number of banking jobs that will be lost in 1992 range up to 100,000, or one of every 15 jobs.

A Toxic Banking Law

As U.S. bankers mull the future, many of their concerns center on what they see as an increasingly harsh regulatory regime. Bankers especially fear the effects of the omnibus banking bill passed by Congress at the end of 1991.

The Federal Deposit Insurance Corporation Improvement Act "is just a disaster," complained Richard L. Thomas, chairman and chief executive of First Chicago Corp. "The crushing burden of regulation is now dramatically increased."

What many industry insiders object to most is the way the new law requires an array of supervisory actions affecting undercapitalized banks.

"Congress has taken away from regulators the ability to use their judgment," said consultant and former FDIC chairman William M. Isaac.

By shoring up the FDIC's Bank Insurance Fund with $70 billion in borrowing authority, the law has kept the U.S. deposit insurance system from going bankrupt. But higher insurance premiums will add significantly to banks' costs, hindering competition with nonbank rivals.

Congress also required the FDIC to move toward a risk-based premium structure in which the weakest banks pay higher rates for deposit insurance. While many bankers like the idea that risky institutions pay more for insurance, putting the concept into practice will be fraught with difficulty.

Safety and soundness rules haven't been the only regulatory matters on the banking agenda. U.S. bankers complain that complying with consumer-rights rules and laws such as the 1977 Community Reinvestment Act is increasingly a drain on time and resources.

But with the industry's record of making credit available to minority group members and low-income communities spotty at best, there is little chance that pressure on banks to do better will diminish.United States'Top FiveRanked by assets; Year ending Percent Worlddollars in millions 12/31/91 12/31/90 change rankCitibank $161,114 $155,394 3.7% 29Bank of America 98,265 94,763 3.7 53Morgan Guaranty 77,917 67,627 15.2 67Chase Manhattan 74,126 73,360 1.0 71Manufacturers Hanover 58,714 56,560 3.8 92Source: American Banker

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.