Magazine article American Banker

Fee Income Seen as Critical for Bank Stocks

Magazine article American Banker

Fee Income Seen as Critical for Bank Stocks

Article excerpt

By TALLEY, KAREN

Banks must derive more earnings from fees or face a chilly reception in the stock market in the months ahead, analysts say.

"It is going to be a difficult year," said Jacqueline Reeves, banking analyst at Salomon Smith Barney. "The general trend has been for margin compression and any more easing of rates will supply additional pressure."

Not all banks "have the flexibility to move deposit prices lower," Ms. Reeves said. "And competition for good loans is increasing."

Given that backdrop, analysts say they expect strong fee-income producers like First Tennessee National Corp.to perform well in 1999.

First Tennessee "should experience continued revenue growth driven by fee-income expansion and modest lending volume," Ms. Reeves said. First Tennessee shares closed Wednesday at $36.25, off 43.75 cents.

She said fees for First Tennessee should come from mortgage banking, capital markets, and transaction processing as these businesses expand. "Expenses should grow modestly and be commensurate with commission-driven revenues," Ms. Reeves said.

Based upon Salomon Smith Barney estimates for 1999, First Tennessee should achieve a return on assets of at least 1.40%, a return on equity of more than 22%, and an internal capital-generation rate of more than 10%.

Bank of New York Corp. is another banking company with an ability to generate noninterest income.

Its earnings related to securities processing rose by 29% from last year's fourth quarter to $274 million.

Bank of New York "showed impressive growth" in the remaining noninterest income categories, including foreign exchange, up 31%, and trust, up 15% over last year's fourth quarter, said Diana Yates, banking analyst with A. …

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