Magazine article American Banker

First-Quarter Earnings Seen Signaling Credit Woes at Biggest Banks

Magazine article American Banker

First-Quarter Earnings Seen Signaling Credit Woes at Biggest Banks

Article excerpt

First-quarter earnings at the nation's biggest banking companies pointed to continued credit-quality concerns, particularly in commercial lending, and highlighted the effect of narrowing margins on banks' ability to reap profits from mortgages and other lending activities.

Analysts said the quarter -- as in previous reporting periods -- continued to illustrate the dramatic divergence between money-center banks, with their wildly profitable investment banking units, and regional banks, which are largely dependent on traditional lending.

Regional banks did participate in and benefit from market activities in greater numbers than in previous quarters, however. Market-sensitive businesses, including brokerage services, contributed an average of 18% of profits in a group of regional banking companies that included BB&T Corp. in Winston-Salem, N.C.; U.S. Bancorp in Minneapolis; and PNC Financial Services Group in Pittsburgh, according to research by Deutsche Banc Alex. Brown. In contrast, market-sensitive activities in the fourth quarter contributed 16.3% of regional banks' profits.

"Absent growth in market-sensitive activities, the underlying growth for the regional bank group was pretty low," said George Bicher, an analyst at Deutsche Banc Alex. Brown.

The quarter's biggest themes included narrowing spreads on the profits banks made from lending. The average net interest margin narrowed by 0.03%, according to Goldman, Sachs & Co. research, an improvement from the decline of 0.08% in the fourth quarter.

Credit quality continued to show signs of strain, particularly in commercial lending, analysts said. Nonperforming assets in the commercial sector rose, particularly at banks that lend to the troubled health-care sector, including First Union Corp. "Expect to see steady but modest increases throughout the year," said David Hilder, an analyst at Morgan Stanley Dean Witter & Co. …

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