Another stellar semester for US banks has brought results ranging from good to even better. The news across the nation for the first half of 1999 reflects two main influences on the activities of the regional institutions.
First, the economic climate has remained benign and, though there are question marks over how long that favourable climate can be expected to endure, there is no sign at present of serious hiccups. The banks, it is true, are facing pressures on margins in their basic business of borrowing and lending. They are, though, with some success generally working to increase the proportion of their income derived from fee and commission income rather than interest revenues.
In many cases, that has involved buying businesses outside traditional commercial banking, particularly in the securities sector but also in other specialised areas of activity. There were some glitches. Two of the biggest banks found it necessary to bring out disappointing forecasts for their full-year results. Back in May, First Union gave an early warning that following "a strategic review and analysis" the outcome for 1999 would be less than previously indicated.
The group had set itself an earnings goal of about $4 a share; now the final figures were expected to show earnings of $3.3bn-3.4bn, or $3.40-3.50 a share. Bank One has a specific issue to address: its credit card business.
A couple of years ago the group Ð now Chicago-based Ð which had grown to a substantial size through a series of mainly modest acquisitions, spread its wings with the purchase of Texas-based credit card specialist First USA. That made the group the third-largest credit card issuer in the US after Citicorp and specialist group MBNA.
This year that buy has proved a problem. Bank One shares dropped sharply after it warned that 1999 operating earnings would be $3.60-$3.65 a share, 7-8 per cent lower than then current market estimates. The fault lay squarely with credit cards, due in part to general factors, including slower growth and increased competition in the industry at large, but also to a number of weaknesses specific to First USA.
The second main element in the banking environment has been the continued impact of mergers and acquisitions. These reached a peak last year and the effects are now showing through, though in a number of cases the get-togethers have also brought short-term costs and at least one group, First Union, has indicated that its strategy has moved away from bank mergers. The ranks of the top US banks have been transformed as a result (the groups in the accompanying table of banks outside New York are listed in the order in which they appeared in THE BANKER Top 1000 ranking in the July 1999 issue).
The new Bank of America is the result of the mother of all mergers. The country's biggest domestic bank, it brought together NationsBank of Charlotte, North Carolina Ð which had already last year taken in Barnett Banks of Florida Ð and California's BankAmerica. Bank One is the marriage of Banc One of Ohio with First Chicago NBD.
First Union of North Carolina took in CoreStates of Philadelphia, Pennsylvania; that may well be First Union's last fling. Wells Fargo of California got together with Norwest of Minneapolis, SunTrust in Atlanta with Crestar in Richmond, Virginia, and National City in Cleveland, Ohio, with First of America in Kalamazoo, Michigan. The regional consolidation trend has continued, though last year's mega-mergers have not been repeated and it is improbable that deals on that scale could arise again. This year has seen a number of further moves, however, even if they are of a rather more modest size.
Most significant is the get-together of Fleet Financial in Boston with BankBoston. Both had previously been involved in deals; BankBoston, whose name had been linked with a number of other possible partners, went with BayBanks, and then bought California-based investment banking boutique Robertson Stephens, spun off from Bank of America as a result of its own merger.
Fleet had recently bought Shawmut of Connecticut, the New Jersey and New York business of the UK's National Westminster, discount broker Quick & Reilly and the credit card operations of Advanta Corporation. In the Midwest, Firstar Corporation of Milwaukee, Wisconsin, which last year took in Star Banc Corporation of Cincinnati, Ohio, is now joining with Mercantile Bancorporation of St. Louis. Two other new groupings, each with assets of around $40bn, will be moving up the rankings. In the southeast, AmSouth Bancorporation of Birmingham, Alabama, is getting into bed with First American of Nashville, Tennessee. And in Salt Lake City, Utah, an in-state Mormon marriage is bringing together Zions Bancorporation and First Security Corporation.
The diverse nature of the recent round of mergers and acquisitions highlights the extensive impact of the removal of restrictions on US banks, particularly those relating to activities across state borders. As a result of that, as well as the opening of new channels for providing banking services including electronic means of delivery, it is for the first time possible to see something approaching nationwide banking in the US.
The prime example of that is Bank of America. The new group was affected by merger-related charges of $145m after tax. But the results for the first half were reasonable. Hugh McColl, chairman and chief executive officer (CEO), felt able to report: "Bank of America continues to make significant progress toward our goals, as reflected in our successful merger integration efforts, solid core operating results and many new initiatives aimed at improving and expanding customer relationships."
At Bank One, John McCoy, president and CEO, has had to change his tune because of the credit card problems. At the time of the half-year results, he said: "Strong revenue generation and disciplined expense management were the highlights of the second quarter, while credit quality remained stable."
By late August, he was able to confirm that the group's post-merger integration was going ahead as planned. He was forced to admit, however: "We are clearly disappointed in this earnings estimate revision. We believe we are taking appropriate actions to generate solid returns and growth in the credit card business." First Union has been on the acquisition trail this year, though outside the banking sector.
It agreed to pay $1.1bn for Everen Capital Corporation, a Chicago-based full-service brokerage and asset management company. The half-year results were flattered by the impact of merger-related and restructuring charges, which dropped from $983m in the first half of last year to $398m this year and helped to give a substantial boost to pre-tax profits. Edward Crutchfield, chairman and CEO, said the half-year figures were "in line with our expectations".
He had earlier explained the reasons for the downward revision in the group's forecasts. "This is an important transition year as we strategically reposition our company for the future. We are compressing a number of initiatives and acquisition consolidation into a short timeframe." He also made a vital statement of new policy: "In addition, with the developing roles of capital markets and capital management, Future Bank [the Internet strategy] and now the expansion of the Internet channel, we are deploying a new business model that no longer includes bank acquisitions as a fundamental part of our strategy."
At Wells Fargo, the new merger with Norwest followed the earlier less than happy hostile takeover of First Interstate in California. One of the main preoccupations has again been post-merger rationalisation. Dick Kovacevich, president and CEO, said: "We are pleased with the progress of our merger integration to date and we continue to be on schedule for systems conversions, which will begin later this year in the overlapping banking states of New Mexico, Nevada and Arizona."
At Fleet, Terrence Murray, chairman and CEO, was looking forward to the next merger. "Fleet demonstrated across the board strength. In addition to record net income, Fleet also reached a major strategic goal recording a 50/50 split between fee and spread revenue. This achievement provides tangible evidence of the success of Fleet's business diversification strategy."
Over at BankBoston, Chad Gifford, chairman and CEO, felt able to report on a "simply terrific quarter", despite more or less static earnings. The group is rather different from most US regionals, in having a significant international presence, particularly in Latin America. Mr Gifford said: "Coupled with Fleet Financial's strong second-quarter results, we are bringing together two companies with great individual momentum that are expected to enjoy significant synergies on both the revenue and cost sides."
Also among the recently merged outfits, SunTrust is beginning to see some results. Phillip Humann, chairman, president and CEO, said: "We are pleased to report another quarter of excellent earnings. The integration of the Crestar merger continued to go well while we maintained solid momentum in revenue growth."
National City, which as well as First of America has also taken in Fort Wayne National Corporation, benefited from the absence of merger expenses, which had cost $275m in the first half of 1998. David Daberko, chairman and CEO, drew attention to efforts to improve the mix of the loan portfolio away from thinly priced assets and a reduction in non-interest expenses He had a word of warning, however. "While these achievements are noteworthy, we have our work cut out for us in the second half of 1999," he said.
At Firstar, Jerry Grundhofer, president and CEO, reported on the group's latest acquisitions. "While this is only the second full quarter following the merger of Star Banc Corporation and Firstar Corporation, we are very pleased with our progress to date and the outstanding effort of our employees." That deal was not the only expansion move; Firstar also acquired 49 Bank One branches in Ohio, Cargill Leasing Corporation and Trans Financial.
Now the group is about to be transformed again with the Mercantile acquisition creating the 13th-largest bank holding company in the US. Sales and purchases form an important part of the news across the board. US Bancorp in Minneapolis, for example, the result of an earlier merger with First Bank System, has since bought the Piper Jaffray Companies. This year it has agreed to acquire Newport Beach-based Western Bancorp and San Diego-based Bank of Commerce. Similarly, Fifth Third of Cincinnati has agreed to buy CNB Bancshares in Indiana and Peoples Bank Corporation in Indianapolis.
Beside the growing list of deals, the other constant theme to emerge is the stress on increasing non-interest income. At Wachovia in North Carolina, for example, chairman and CEO LM Baker reported: "Two-thirds of the revenue expansion was from fee-income sources." At KeyCorp in Cleveland Robert Gillespie said: "Results for the quarter demonstrate significant progress in our drive to reshape the company's revenue mix."
At PNC in Pittsburgh, Thomas O'Brien reported that growth across a broad range of businesses "has further strengthened our revenue mix, with core non-interest income increasing 21 per cent over 1998 levels". The restructuring and consolidation is set to continue. So, it seems, is the favourable climate, at least for the time being. At least that is what the commentators feel.
At Brown Brothers Harriman, for example, Raphael Soifer observed: "In the second quarter of 1999, the aggregate return on common equity of our US banking universe reached an all-time record of 20 per cent, breaking the record of 19.6 per cent set in the first quarter."
Keefe, Bruyette & Woods was surprised. "In the aggregate, reported results matched or exceeded our estimates, and following the earnings releases, we raised more estimates than we cut by a margin of two-and-a-half to one. Simply put, the quarter was very good, and the outlook appears to be even better than we thought just three months ago." Long may it last, cry the banks.
