Profitable Year Gives Banks Short Breather but Nonbank Financial Institutions Continue to Ratchet Up Pressure on Banking Industry, Spurring Consolidation

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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. …