Last year was a bumper one for the US banks. From the local and regional retail outfits to the international money centre groups, to the specialised investment banking and fee-earning businesses, circumstances conspired in their favour.

But it cannot be expected to last forever. Even with everything going for them, a couple of the big regional banks - Bank One in Chicago and First Union in Charlotte - managed to find problems of their own. The wave of mega-mergers that has contributed to the recent performance has run its course and, although there is scope for further consolidation, some of the so-called super-regional banks are now looking a little less super.

The biggest source of concern has to be just how long the growth of the US economy can be expected to last. It has enjoyed an unprecedented run of years of expansion, accompanied by booming stock markets. That, in turn, has provided a comfortable background for banks both in their domestic lending operations and in market-related business. Now there are starting to be some signs of pressure, as interest rates are pushed up, there are indications of weakening margins in retail banking operations and worries grow about the possibility of a Wall Street collapse. For the time being, though, everything has remained rosy for both the commercial and the investment banks.

Last year the home market stayed strong. On the international front, the banks were spared the turmoil sparked off by problems in Asia and then in Russia, which had clobbered them in the previous year. The impact of the merger boom is beginning to show through, as the banks involved leave behind the initial first-year charges and start to see the benefits of cost reductions. The effects are plain from the accompanying table of the top 20 US banks.

Most of the top rank are seeing the effects of earlier mergers and acquisitions, while two, FleetBoston and Firstar, have moved up the rankings as a result of more recent get-togethers. There are also some absences. Bankers Trust, essentially an investment rather than retail banking operation, has been swallowed up by Deutsche Bank as the German group has a final shot at establishing a convincing presence in New York. Republic New York, specialising in private banking, has been absorbed by the UK's HSBC. At the top of the list, Citigroup is sui generis.

It is a financial conglomerate with extensive international retail banking operations but also strong representation in insurance and investment banking - the latter about to be strengthened following the acquisition of the London-based operation of Schroders. That characteristic is reflected in its revenue flows, with fees and other non-interest income last year at $37bn against $20bn in net interest income. Its results are the first full year for the combination of Citicorp with Travelers - including its investment banking operation Salomon Smith Barney - and reflect a number of factors.

One was the achievement of the targeted $2bn in annual expense reductions; more are forecast for this year. Another was the result from the global corporate and investment banking business, with a good year including particularly a strong improvement at Salomon Smith Barney, which had suffered in the 1998 market upset but last year saw net core income recover dramatically from $408m to $2,354m.

Co-chairmen and chief executives John Reed and Sandy Weill were pleased with themselves. "The superior results we achieved in the first full year of our merger underscores our progress in establishing Citigroup as a world-class, global growth company," they said. They are also pleased with the fact that the US Congress has finally moved to ditch the barriers between the banking, insurance and brokerage industries enshrined in the 1933 Glass-Steagall Act (The Banker, 12/99, p63), which would otherwise have forced to group to divest the insurance underwriting business.

They added: "Our exceptionally strong capital position and the successful integration of our global businesses will enable us to take full advantage of the new financial modernisation legislation in the coming year. This legislation opens up new horizons for our company and will facilitate our expansion in the global financial services arena." Bank of America, bringing together NationsBank of North Carolina - which had already absorbed Barnett Banks of Florida - and BankAmerica in California is now the biggest bank in the US, with results that reflect a more traditional commercial banking split of business in terms of interest income. It benefited last year from, among other things, lower merger-related charges.

Chairman and chief executive Hugh McColl said: "1999 was a significant step in the right direction. We delivered above-average earnings growth and either met or made progress toward our other financial targets. Our merger transition effort could not have gone more smoothly. We ended the year having consolidated all of our business lines, expanded our investment banking platform and made substantial progress in our relationship-based strategies." Chase Manhattan in New York, which had been through its own mergers rather earlier, has been carefully building up its non-interest sources of income, now comfortably exceeding the interest income contribution. In December the group completed the acquisition of Hambrecht & Quist, the San Francisco-based boutique specialising in technology-related businesses (The Banker, 11/99, p58).

New chairman and chief executive officer William Harrison commented: "The acquisition of Hambrecht & Quist positions us more strongly in the area of the greatest growth opportunities in investment banking." The group reported a 31 per cent increase in investment banking fees in the 1999 fourth quarter to $499m. Mr Harrison said: "1999 was a terrific year for Chase and these results provide a strong signal that this company is capable of producing exceptional returns. Both fourth-quarter and full-year results demonstrate clearly that the new equation at Chase has fully emerged." Wells Fargo on the west coast is also seeing the pay-off from its merger with Norwest of Minneapolis, which in 1998 brought substantial merger costs. With those behind it, the group produced sharp gains last year.

Dick Kovacevich, president and chief executive officer, said: "We are pleased to report that the first full year of the merger of equals of Norwest and Wells Fargo has been a great success and that we have met the three key expectations stated at the time the merger was announced. First, diluted earnings per share for 1999 is in line with the projections. Second, we are already experiencing some revenue and cross-selling momentum. Third, we've been faithful to our commitment to begin every decision with our customers' best interests in mind." Bank One's troubles stem not from its recent merger with First Chicago NBD but its 1997 acquisition of specialist credit card company First USA.

Problems there brought first a profit warning then the immediate retirement of chairman and CEO John McCoy, who had overseen Bank One's expansion through a series of mainly small purchases from a modest bank in Columbus, Ohio, to a regional powerhouse. Verne Istock from the First Chicago camp took over as acting CEO while the group took on consultants Russell Reynolds Associates to search for a new boss. He promised an improvement when the new group presented its 1999 figures. "Bank One's operating results for the fourth quarter and full year are consistent with previously communicated expectations. All of Bank One's businesses, except credit card, continue to perform within targeted ranges.

We have a comprehensive plan to rebuild First USA's performance close to industry levels by the end of 2000." The Bank One situation attracted some heavy criticism at a time when the credit card business generally is performing reasonably well, despite pressures on interest margins. Analysts Keefe, Bruyette & Woods admitted that growth had become more difficult for a number of other major issuers, including Chase and Morgan Stanley Dean Witter. However: "Arguably Bank One took what should have been a manageable disappointment - slower-than-expected earnings growth - and turned it into a major corporate disruption." Problems there could be of benefit to other specialists, including MBNA Corporation in Wilmington, Delaware.

The company's president Charlie Cawley commented on the 1999 results: "All of us at MBNA are proud of our consistent earnings record, averaging an increase of 25 per cent in each of the 36 quarters or nine years since MBNA became a public company." There are, though, growing signs of consolidation in the credit card industry, as economies of scale grow more important and banks which are less committed sell out. SunTrust Banks in Atlanta is one. Last year it sold its $1.5bn consumer credit card portfolio - including the outstandings acquired with Crestar Financial in 1998 - to MBNA. The sale brought a net gain of $202.6m in the final quarter of last year. President and CEO Phillip Humann said: "Despite all the unusual items during the year, 1999 was a year of significant accomplishment.

We continued our record of historical earnings growth while at the same time taking a number of steps to enhance our strategic focus and competitive positioning for the future." Similarly Keycorp in Cleveland, a regional bank that has been under a good deal of pressure in the stock market, agreed at the end of last year on an "agent bank partnership" under which it sold its $1.3bn credit card portfolio to Associates First Capital Corporation based in Dallas. Commenting on the annual results, chairman and CEO Robert Gillespie drew attention to the record earnings and recent developments.

"The strategic actions we have taken in the fourth quarter - including selling our Long Island retail business and reaching an agreement to sell our credit card operations - support our strategic transformation into an integrated, multi-line financial services company and allow us to direct our financial resources and people towards our faster growing businesses," he said. Over in Charlotte, the North Carolina city that has become a banking powerhouse, First Union had been forced to issue two profit warnings as its acquisition of CoreStates Financial in Philadelphia turned out to be a rather a large meal to digest. Last May, chairman and CEO Edward Crutchfield explained: "In 1999 we were faced with overcoming the impact of substantial 1998 unusual, non-core earnings items, major acquisition integration and acceleration of spending for major new strategic initiatives as we deploy a new business model." That model, he also made clear, "no longer includes bank acquisitions as a fundamental part of our strategy".

Looking at the full-year figures, Mr Crutchfield said: "1999 ended with strong fee and net interest income growth coupled with stable credit quality and net charge-offs of 0.52 per cent of loans. Our return on equity and net charge-off ratios rank among the best in the industry." FleetBoston, the result of the merger between Fleet Financial and BankBoston (The Banker, 4/99, p6), saw initial costs from the get-together which closed at the beginning of October. Merger and related expenses of $760m after tax left a net loss of $34m in the fourth quarter. Chairman and CEO Terrence Murray said: "The fourth quarter capped a truly remarkable year with great accomplishments in attaining record operating earnings, merger progress and strategic positioning."

Similarly, Firstar in Milwaukee saw the impact of costs related to its combination with Mercantile Bancorporation of St Louis and other recent mergers. The total for last year was $470m against $377m in the previous year. Despite those charges, the new group was able to report substantial growth. President and CEO Jerry Grundhofer said: "The fourth quarter of 1999, the first full quarter after our combination with Mercantile Bancorporation, resulted in strong loan and deposit growth, a much-improved margin, good revenue growth and well managed expenses." In New York, JP Morgan offers a complete contrast as a bank that has concentrated on investment banking.

That focus is reflected in the balance of revenues, with non-interest income of $7bn heavily outweighing $1.5bn of net interest income. It has also made income streams more volatile, with the 1998 outturn suffering from market uncertainties. Recovery from those problems made the group the star performer last year, with pre-tax profits more than doubled. Chairman Douglas Warner was laid back, saying: "We have made significant progress on each of our strategic growth initiatives, and are very pleased with the past year's strong financial results. Going into the new year, we have excellent momentum across our major business lines." Concentration on developing non-interest income is a growing phenomenon. Bank of New York - which in 1998 tried unsuccessfully to buy Mellon - has focused on fee-earning business. Chairman and CEO Thomas Renyi commented: "Record results for the year and fourth quarter reflect the successful execution of the company's consistent, long-term strategy to emphasise fiduciary, securities servicing and cash processing services to our global clients. Our continued repositioning of the company's business profile, as evidenced by our acquisition of Royal Bank of Scotland Trust Bank and the divestiture of our commercial finance business, drove non-interest income to 61 per cent of total revenue, up from 58 per cent last year."

Mellon, which back in 1997 was brusquely rejected when it made an approach to CoreStates, has similarly been changing its strategy. Its most important recent actions were the divestitures last year of its credit card business, its network services transaction processing unit and its mortgage businesses. Said chairman and CEO Martin McGuinn: "The performance of the past quarter, which follows the completion of our divestiture programme and the sharpening of our strategic focus, clearly shows we are in an excellent position to expand on our leadership positions in our high-growth, high-return businesses." Other banks are looking for increased fee income to offset pressures on interest earnings.

At US Bancorp in Minneapolis, for example, chairman and CEO John Grundhofer admitted that results last year were below long-term targets. "The fourth quarter marks the beginning of our new strategic course for the year 2000 and beyond. We are making investments in our businesses that will accelerate growth and position the company to compete and succeed in the financial services industry," he said. Those moves have included the purchase of the Piper Jaffray Companies in the investment banking arena.

At PNC in Pittsburgh, there has been a push to increase fees, with non-interest earnings now higher than interest income. Chairman and CEO Thomas O'Brien said: "Our record 1999 reinforces that our transition to a national, diversified financial services company is beginning to drive very solid performance." Similarly, Wachovia in North Carolina reported strong earnings growth and, said chairman and CEO LM Baker, "several key acquisitions that enhanced Wachovia's wealth management and capital markets capabilities".

Throughout the top ranks of the US banking industry, individual groups are looking for their own way forward. They have enjoyed a period of relative calm courtesy of the booming economy. Questions remain. How much further can the regional consolidation be taken without causing more cases of indigestion? How far will regional banks be able to compete not just with their bigger compatriots but with new means of delivering financial services? How successful will the smaller banks which have decided to develop fee income be in competing with the specialists in areas such as credit cards and in increasingly crowded capital markets activities?

Above all, the biggest uncertainty is over which banks will be best placed to cope or even to survive when, as must happen eventually, the cheerful economic background turns to gloom and despondency.


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