Profitable Year Gives Banks Short Breather

UNITED States banks are ringing in the new year on a heady note: Profits in 1993 reached an all-time industry high of $32.6 billion - even without adding the still-unknown figures for the quarter just ended.

This year promises to be another strong one, analysts say. ``If [interest] rates remain stable, I would not see any dramatic change in the earnings streams,'' says Charles Hebert, an analyst with Ferguson & Co., a research firm in Irving, Texas.

This robust position is reassuring to politicians and regulators who, only three years ago, were concerned that banks were headed for a massive government bailout comparable to the savings-and-loan fiasco.

``There's no reason to think that there will be a dramatic downturn,'' said Andrew Hove, acting chairman of the Federal Deposit Insurance Corporation (FDIC), when he released industry profit figures last month. Two facts tell how stunning the turnaround has been:

r One key measure of profitability, return on assets, was more than 1.2 percent last year. This is twice the average attained during the 1980-91 period. In the Midwest, currently the healthiest region, the figure recently reached 1.53 percent.

r The assets of the banks and savings- and-loan associations on the FDIC's ``problem'' list have fallen to $379 billion, half of their 1991 peak and less than 10 percent of total industry assets.

With many banks sitting pretty, will the pace of mergers and consolidation in the industry slow? Some observers say this appears to be occurring already. But the total number of banks and thrifts is still likely to keep shrinking.

According to economist Larry Wall of the Federal Reserve Bank of Atlanta, today's billowing profits may not last. He predicts some tightening of banks' interest-rate ``spread,'' the difference between what they earn on loans and what they pay for funds. Over the last few years, interest rate changes have been working sharply in banks' favor.

While the percentage of bad loans has been improving steadily, that also may not last as banks start to lend more.

Even after significant cost-cutting in the recent recession, the industry remains under pressure from nonbank financial companies.

On the deposit side, low interest rates on bank savings are pushing loads of money into mutual funds. Total bank and thrift deposits fell slightly in the year ended Sept. 30. On the loan side, companies and individuals are turning to a variety of sources other than banks. Even as the economic recovery gained momentum, bank and thrift loans to businesses are down 3.2 percent from September 1992. Loans to individuals rose 5.2 percent.

Though a rise in interest rates could squeeze the banks' ``spread,'' it might also lure deposits back from mutual funds. Still, mutual funds appear poised to surpass banks in total assets by 1995 or 1996, says David Hale, chief economist with Kemper Securities in Chicago.

In response, banks will likely continue merging, cost-cutting, and developing their own mutual funds. The most prominent recent merger, in fact, has been of Mellon Bank Corporation with mutual-fund leader Dreyfus Corporation.

A 1991 survey of bank chiefs concluded that 1 of every 4 banks would disappear by the year 2000. In the last year, the activity has been brisk, with a net loss of 655 institutions, almost 5 percent of all banks or savings and loans.

Mr. Wall says bank profits, by driving up stock prices, are making acquisition targets more expensive. Yet the same trend has made it easier for suitors to raise fresh capital, as many have done.

HERE in the Northwest, even as large banks or thrifts expand by gobbling up smaller ones, new institutions have been opening and thriving. Thus, the total number of banks in the area has not changed much, says banking expert Jim Palmer of Piper, Jaffray, a securities firm. He says that a larger share of deposits in this region are held by a few big players: US Bank, Washington Mutual Savings Bank, West One, and Key Bank. Mr. Palmer sees the pace of acquisitions in the region growing slower than it has been in recent years.

While the economy is improving in other regions of the country, Palmer says the aerospace slowdown hitting the Boeing Company makes it doubtful that Northwest banks will post strong profit gains this year. He adds that the region's increasingly diverse economy makes a drop in earnings unlikely.

Southern California, another area hard-hit by the defense/aerospace slump, is in deeper trouble.

Jonathan Nueberger, an economist with the Federal Reserve Bank of San Francisco, says community banks still have high problem-loan levels, aggravated by a real-estate slide. Bigger California banks, such as Wells Fargo and First Interstate, are benefiting from the better economy in the northern half of the state. ``For the state as a whole things are definitely improving,'' Mr. Nueberger says.

California's problem-loan ratio has fallen from 7.9 percent to 6.9 percent in the year ended last September, analyst Mr. Hebert says.