Bank Scoreboard: Mediocre Didn't Look Half Bad

Return on equity measured a paltry 6.5%--but that's a jump over 1989's abysmal results

Bankers did not exactly have a terrific time in 1990. The real estate market continued to deteriorate. Consumer loan delinquencies began rising. And a potentially severe recession loomed. Still, as banks lick their wounds these days, memories of last year may not be as bitter as they earlier thought. Last year's results, while lackluster, are still a welcome change from 1989.

A look at BUSINESS WEEK's annual Bank Scoreboard, which begins on page 82, details the improvement. Net income at the nation's top 100 banks, as measured by assets, rose 10% in 1990, to $8.9 billion. True, the industry's return on equity was a paltry 6.5%. But that's a big advance when measured against 1989's performance. Profits at the 100 biggest banks tumbled 59% in 1989, to $7.3 billion, as many set aside huge reserves against Third World loans. Return on equity stood at 5.6%.

The most profitable bank in 1990 was Bankers Trust. Although all money-center banks made money last year, BT had a hefty ROE of 26.7%. It earned $665 million in 1990, compared with a loss of $980 million in 1989. The results were helped by a 42% jump in revenue from bond and foreign-exchange trading in the final quarter to $227 million.

EMPTY OFFICES. San Francisco-based Wells Fargo was a close second in profitability, with an ROE of 25.1%. Wells was No. 2 last year as well. It achieved those numbers despite several downgrades by bond-rating agencies last year because of its risky loan portfolio. Highly leveraged transactions, mostly leveraged buyout loans, accounted for an above-average 7.4% of Wells's loan portfolio at the end of 1990.

Wells also turned up on 1990's list of consistently strong performers. Since 1986, it has had a 37.3% annual growth rate in earnings per share. Chicago-based Continental Bank tops the list of steady earners, with a 49.4% increase over the past five years. But those results can be misleading. Continental earned 95~ a share last year--but it lost $20.48 a share in 1987 from huge Third World loan write-offs.

While the bottom line improved in 1990, credit quality remained a big issue. This time, the culprit was commercial real estate. Empty office buildings and unfinished condominiums battered bank balance sheets. James J. McDermott, president of Keefe, Bruyette & Woods, reckons that big banks set aside upwards of $19 billion in reserves against bad loans, mostly for real estate. That's almost double what would be expected in a normal year, he says.

The worst problems were in the Northeast, where recession slammed the economy throughout 1990. Buffalo (N. Y.)-based Marine Midland, which is owned by Hongkong & Shanghai Banking, posted the highest ratio of nonperforming loans last year, largely because of real estate. Of Marine Midland's $20 billion in total assets, 7.3% were classified as nonperforming. The bank lost $295.6 million last year.

Investors were quick to note the industry's real estate woes. Bank stocks suffered broad declines last year. Also discouraging investors were sharp dividend cutbacks as regulators pressured banks to build their capital. As of Mar. 28, 1991, the total market value of the top 100 banks had fallen 5% from a year ago. Northeast banks were the hardest hit. The market value of Midlantic in Edison, N. J., plunged 68%. Shawmut National, based in Hartford, fell 61%.

HAWAIIAN HAVEN. Of course, not every bank worried about real estate loans. Bankers in the Midwest remain unperturbed. Property markets in the region remained calm through most of the 1980s and showed none of the excessive price inflation common to the Northeast. California banks also held up well, and not just Wells Fargo: Crosstown rival BankAmerica and Los Angeles-based First Interstate produced handsome ROEs of 15.5% and 18.2%, respectively. Although some Wall Street analysts spent much of last year warning about a sharp downturn in California real estate prices, the collapse never occurred.

Perhaps the safest lending environment last year was in Hawaii. A meager 0.1% of First Hawaiian's assets were nonperforming last year, making it the safest bank among the top 100. The clean portfolio of Hawaii's second-largest bank reflects not only fairly conservative lending standards but also the state's resilient economy. Economic growth last year was 5%, compared with 0.9% for the rest of the country.

With 48 branches in Hawaii and two on Guam, First Hawaiian will expand its franchise in May by acquiring First Interstate of Hawaii. The deal to buy First Interstate, owned by an investor group led by former Treasury Secretary William E. Simon, was widely publicized last year after antitrust concerns prompted the Justice Dept. to delay the merger.

Many analysts are reluctant to predict an industry turnaround this year. Lower interest rates will help. But uncertainty about when the recession will end, combined with the continued real estate slump, seems good reason for caution. Citicorp Chairman and CEO John S. Reed says Citi, the nation's biggest real estate lender, may add $2 billion worth of loans to its list of nonperformers in the first half of the year. At the close of 1990, 6% of Citi's $217 billion asset base was nonperforming.

Highly leveraged transactions are another concern. On Apr. 9, for example, Bank of New York reported a loss of $63 million for the first three months, vs. a $102 million profit a year ago. The bank boosted its reserves against bad loans after adding $296 million worth of loans to its list of nonperforming credits. Almost half were highly leveraged transactions. What's more, analysts have grown more leery of consumer debt. In recent months, consumer loan problems, such as credit card delinquencies, have increased. But these loans, says Keefe's McDermott, "will cut into profits, not obliterate them."

All in all, 1991 will be no walk on a Hawaiian beach. Salomon Brothers Inc. analyst Thomas H. Hanley says earnings for the 35 big banks that he tracks could rise 3% at best. But given banks' performance in recent years, maybe that's not so bad.

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