Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, November 6, 1994 TAG: 9412070161
SECTION: BUSINESS PAGE: F1 EDITION: METRO
SOURCE: MAG POFF
DATELINE: LENGTH: Medium
The pace of earnings should flag after 36 months, said Ben Jenkins, president of Roanoke-based First Union National Bank of Virginia. The spread between interest rates will close, he said, "and at some point we'll go back to earning money the old-fashioned way....It won't be quite as easy as it has been the last two or three years."
The challenge, Jenkins said, will be on the revenue side. If the spread narrows, he said, interest and fee income will become more important.
If banks are to grow, he said, they must develop new businesses such as capital market placements of commercial business, trust services and sales of mutual funds.
The underlying problem, Jenkins said, is too many banks chasing business so that it is hard to show a profit. "Some will do well; some will do less well."
Eugene Putnam, director of investor relations for Crestar Financial Corp., said the trend is sustainable over the foreseeable few years. The market, he said, believes that interest rates will climb higher, squeezing bank profits. But he believes that banks are better positioned than they were in the past to cope with rising rates.
Banks will face difficulties as rates rise, said Carson Quarles, president of Central Fidelity Bank's Roanoke-based southwestern region. The cost of deposits, he said, will go up faster than some banks can adjust to the situation so that profits will moderate next year.
Bank profits, he said, "are squeezing now." That's the reason, he explained, that bank stocks "have been kind of out of favor" in the last three or four months. This reduces the likelihood of any take-overs because "the math won't work."
Henry J. Coffey Jr., a bank analyst with J.C. Bradford & Co. in Nashville, said profits can be maintained next year "if discipline is kept up" in lending, controls over costs and careful pricing of acquisitions. Rising interest rates "will put up a number of hurdles for banks to jump over," and those that lack efficiency will find that some other bank "will do it for you - or to you."
Those who navigate the hurdles, on the other hand, will do well, Coffey said.
David West, an analyst with Davenport & Co. has "some concerns" about shrinking margins. With deposits declining and loan demand rising, West said, interest rate competition will heat up in both categories, hurting banks. And, he said, credit quality no longer has room for improvement.
David Stumpf of Wheat First Butcher Singer sees increasing pressure on interest margins. But, he said, profits from stronger loan demand may offset higher rates paid on deposits.
A lot depends on the economy, according to Randolph McElroy, president of NationsBank's Roanoke area operations. People are paying more taxes because of the federal budget bill, thus hurting the economy.
Rick Bowman, chief financial officer of First Virginia Banks is uncertain. Banks have used up all the cash set aside for bad loans that never materialized, he noted, so that money will not be available next year.
At the same time, he said, the cost of deposits will increase, so the industry may not perform well in the coming years.
Banks need strong capital and consistent earnings to maintain a stock price that will avoid acquisitions, he said. If income falls and net worth weakens, he said, a bank is subject to take-over. It will, he said, "be tougher and tougher" to avoid that fate.
Teresa Jones, vice president of Signet Banking Corp. is more optimistic. Banks, she said, have a good community, employees and customers. And they have "a new way of doing business....We've been through a whole lot and we've learned something," she said.
"Bankers, they never learn," said a doubter, Charles O. Meiburg, professor of business administration at the Darden School of the University of Virginia.
Their interest paid on deposits is still under control, he said, but one day soon depositors will wake up and demand higher rates. Banks will meet that demand to keep the deposits, he said, and their profit margin on loans will begin to shrink.
At the same time, he said, rising loan demand will trigger competition to make loans. Bankers, Meiburg said, will tell themselves that another bank will make the loan if they don't and the cycle of shrinking margins and bad loans will begin all over again.
Medium-sized banks cannot survive, Meiburg said. Customers will support community banks, he believes, and really large banks are getting their technology in order to appear more like community banks.
Banks of "that awkward size," he said, will disappear. "How many Central Fidelities, Crestars and Signets do you need?," he asked. Those banks, he said, cannot invest in the technology needed to survive in tomorrow's market.
by CNB