Don’t cry any tears for your local banker. Profits are still rolling in; bank earnings set another record in the first quarter of 1993, and many securities analysts expect even better reports in the year ahead. But a close look at banks’ income statements gives cause for caution. The banks have not turned around their fundamental long-term problem-their increasing irrelevance to American companies and consumers. Almost all the earnings gains come from cutting costs and putting less money aside to cover bad loans, not from building the business. “It’s kind of like winning a football game by playing good defense rather than by scoring a lot of points,” says James McDermott Jr., head of the investment bank Keefe Bruyette and Woods. The consequences: more mergers and layoffs-and perhaps a longer trip to the nearest bank.
Consider industry superstar Banc One Corp. Its first-quarter profits were up 61 percent. The cause? A $120 million drop in the amount it set aside to cover bad loans. Nothing wrong with a healthier portfolio, but you can’t reduce the set-aside for bad loans year after year. It’s a one-time shot to earnings. The same is true of cost cutting. Buying a badly run bank and wringing out expenses can make the bottom line look strong: since acquiring rival Security Pacific in 1992, BankAmerica Corp. has closed 440 of their combined 1,440 California branches. But keeping profits up requires repeating that performance annually. “Without the cost savings from mergers, we’d look like everyone else,” admits the finance chief of one well-regarded institution.
Dying business:Behind such tactics is the fact that banks’ traditional business is stagnant. Even medium-size companies are shunning bank loans; they raise funds more cheaply by selling bonds and short-term notes, privileges once reserved for blue-chip corporations. The banks themselves don’t want the high-rolling developers and buyout artists they embraced in the late 1980s. “The lending side of the business really hasn’t been going anywhere,” says Stuart Hoffman of PNC, a Pittsburgh bank. Many consumers are doing their best to avoid banks, too: they can turn to AT&T and General Motors for credit, and they now keep almost as much money in mutual funds as in savings accounts and certificates of deposit.
To adapt, banks like Boatmen’s of St. Louis and Meridian of Reading, Pa., are acting more like retailers, pushing stock brokerage, mutual-fund sales and mortgage origination, which yield a fee for each transaction. But there aren’t enough fees to go around. Even if lending picks up a bit this year, banking’s merger binge will continue as institutions struggle to adapt to shrinkage.
For customers, that means consumer services like small loans and small checking accounts will likely cost more. For investors, it raises a tough question: what will bankers do with the $12 billion of equity they’ve raised since early 1992? Individually, banks want the capital to buy up competitors. But collectively, they may have raised more than their shrinking industry can use profitably. “You should start seeing capital flight from banking because the returns just aren’t there,” says Washington consultant Bert Ely. Even without a crisis, there’s plenty of turmoil ahead.
