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Banking: After a strong 2000, banks face a tug of war
Sunday, March 25, 2001 By Patricia Sabatini, Post-Gazette Staff Writer
Even as the giddy economy strained to a near halt, banks as a whole racked up another year of solid profits in 2000.
The biggest highlight for many, however, was the rebound in their stock prices.
After a nearly two-year slumber, bank shares came roaring back with double-digit gains as the Federal Reserve eased its grip on credit and refrained from raising interest rates for much of the year.
Among the region's top banks, PNC stock turned in the biggest increase, leaping 64 percent on the year. Mellon jumped 44 percent, while National City rose 21 percent, owing to an 11th-hour surge.
With annual meeting season about to hit full swing, a bank CEO couldn't ask for more. Or could he?
One veteran banking consultant believes that bank shares will spend much of 2001 marking time.
"They did so well [in 2000], I don't know how much upside there is from here," said Arnold Danielson of Danielson Associates Inc. in Rockville, Md.
Prices have pulled back so far this year, especially in recent weeks, leaving PNC, Mellon and National City all down between about 10 percent and 20 percent.
The direction of bank stocks will be influenced by a "tug of war" between rising loan losses triggered by the slowing economy and the positive effects of the Federal Reserve's hearty rate cuts in January and again this month, said longtime bank analyst James Schutz of Stevens Inc. in Chicago.
"I think it will be a tie in the first half of the year, then rates will win out and the banking sector will do reasonably well in the second half," he said.
Although the volume of bad loans is expected to keep growing, "so far it's been nothing to panic about."
For the most part, Schutz said, today's troubled loans were made in 1997 and 1998, a period when banks were loosening their credit standards.
"After mid-'98, the system really clamped down," he said. "On the whole, loans put on the books after that look OK."
He expects bank stocks to outperform the market this year, averaging gains in the 12 percent to 15 percent range, slightly below last year's performance.
That projection assumes the economy turns out to be in the midst of a soft, not crash, landing.
Already, bank profits are under pressure from rising problem loans, slower economic growth and the downturn in the stock market that has crimped money management fees.
As a result, the sector will be working harder to stay ahead.
"I think banks will have trouble truly beating the previous year" in terms of profit gains, Danielson said.
"It's still going to be a good year, but not spectacular."
Expect the industry to move to bolster profits by aggressively scaling back spending and cutting jobs.
Although large scale layoffs have yet to emerge, many firms apparently are retrenching through attrition.
Citigroup, the largest financial services firm in the country, reportedly is planning spending cuts that would total as much as $2 billion, including substantial cuts at its Smith Barney brokerage.
Big name brokerages including Merrill Lynch, Charles Schwab and Bear Stearns, also have been pulling back.
Locally, Mellon last month initiated a corporatewide belt-tightening effort dubbed project "LEAP" for "lifting earnings and performance." The company said it had no specific cost-cutting targets and that no layoffs were imminent, but acknowledged that employees who leave may not be replaced.
Under the program, a team of senior managers is being charged with devising ways to cut costs and boost revenues. The review is expected to last through the summer.
On the mergers and acquisitions front, analysts are expecting another quiet year.
Why? There just aren't many buyers willing to offer the lofty premiums that fed a merger frenzy in 1997 and 1998, said Danielson, an M&A specialist.
"By and large we expect a very slow year. And we're in the business, so we're not happy about it."
Companies, after all, are less inclined to stick their necks out in a slowing economy.
Among the region's three biggest banks, Cleveland-based National City is considered the most likely takeover candidate, Danielson said.
"National City is more of a traditional bank serving low-growth markets. It hasn't diversified the way the others have. It's a good bank, but it has growth problems."
Its future as an independent entity "is more debatable" than either Mellon or PNC, he said.
"If Mellon ever gets sold, it will be because somebody offered a price so high, they had to take it."
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