Industry prepares for tougher times; Performance hinges on healthy economy, rising stock market


After several years of rising profits and stock prices, the banking industry is heading for tougher times this year, experts say.

Competition is intensifying with cutthroat pricing, finding good loans is becoming more difficult, and a downturn in the economy could sap earnings.

"If we have an economic environment that is relatively stable, I think banks will squeak out a decent year," said David Stumpf, a banking analyst at A.G. Edwards & Sons Inc. in St. Louis. "The $64,000 question is, 'How strong is the economy going to be, and what perils might be out there from a macro perspective?'"

A strong performance for banks this year hinges on a healthy economy and confidence that the stock market will continue rising, experts say. If problems in the Middle East escalate, and overseas economies, such as Japan and Brazil, worsen, consumer confidence could wane.

"When consumer confidence erodes and the confidence in the valuation of the market erodes, then you start seeing people panic because they are watching their wealth disappear," said J. Scott Wilfong, president of Crestar Bank's Maryland region, which was acquired last year by Atlanta-based SunTrust Banks Inc. to form the country's 10th-largest banking company.

But Wilfong is optimistic that the year will be a good one for Crestar and SunTrust.

"I don't see anything major that has got me staying up at night," he said.

If the economy turns down, however, it could result in fewer home loans, fewer car loans and more borrowers falling behind on loan and credit card payments.

"A bump down is going to have a major impact on everyone," said Dallas R. Arthur, president and chief executive of Carrollton Bancorp in Baltimore.

The industry has enjoyed a remarkable profit run, fueled in part by the strong economy. The near-perfect conditions helped banks improve the quality of their loan portfolios, build capital and reserves, and expand into other businesses so they could compete with mutual funds, pension funds and insurance companies that have tried to take away their business. Even the rate of credit card delinquencies, which has soared in recent years, had finally stabilized.

But the profit streak was ended in last year's third quarter, when some of the nation's biggest banks lost millions on overseas lending and trading. Analysts expect the trend to continue through 1999, where it will be more difficult to make record profits.

"We are seeing across-the-board revenue walls where institutions are now having real trouble making their quarter-over-quarter earnings gains," said Jon Holtaway, senior vice president at Danielson Associates Inc., a Rockville-based bank consulting firm. "When you reach the top, there is no place to go but down."

Stumpf expects earnings for the year to be "OK," barring any significant catastrophes.

"The wild card is credit quality," Stumpf said. "If credit costs start to creep into the equation, high provisions will make it next to impossible for banks to have a decent year."

Holtaway expects few loan problems to crop up this year because banks in the Maryland region have been careful to book quality credits.

"We don't see a real estate bubble, we don't see some type of excessive commercial lending, we are not poised for a credit quality problem in our local region," he said. While most banks in Maryland grew profitably last year, executives expect it will be tougher to make money this year. Bank margins -- the amount a bank earns on loans and investments after interest payments to depositors and creditors -- are shrinking because of highly competitive loan pricing.

"Competing for the customer's wallet is going to be fierce" this year, said Frank Bramble,chief executive of First Maryland Bancorp. "For 1999, earnings will be more challenging than they were in 1998, particularly if [interest] rates continue to go down."

First Maryland spent $120 million upgrading its computer systems last year, and this year it will change its name, revamp its product line and launch a marketing campaign, so it is ready to meet the competition, Bramble said.

"We have a chance at driving some additional revenue into the company," Bramble said.

That doesn't mean community banks are going to buckle under. If anything, bankers who run small institutions argue that they have a better rapport with customers.

"I think we have the capacity to compete against the larger institutions, one on one," said Arthur, Carrollton's chief executive.

If the economy remains strong and banks flourish, experts are predicting more megamergers. Last year, five of the largest deals in banking history were announced, and 461 banks merged with a total deal value of $284.7 billion, nearly triple the value of deals in 1997, according to SNL Securities LC, a Charlottesville, Va.-based financial information services firm.

The huge deals came in rapid-fire succession in April with Citicorp and Travelers Group merging in a $70 billion transaction. The two created the world's biggest financial services company, called Citigroup, with about $700 billion in assets and 100 million customers.

On its heels came a $59 billion union between Charlotte, N.C.-based NationsBank Corp. and BankAmerica Corp. of San Francisco to create the country's first coast-to-coast banking giant with $570 billion in assets and 29 million customers.

Six Maryland institutions were acquired last year, with the largest deal being Winston-Salem, N.C.-BB&T; Corp.'s acquisition of Hyattsville-based Maryland Federal Bancorp for $254.6 million, according to SNL.

The deal-making should continue if the economy stays healthy and bank stocks rebound.

"There is a real battle for market share," Bramble said. "We certainly are interested in expanding our presence."

Pub Date: 01/24/99

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