Riding the rising tide of an economic boom

Profits: Growth could continue if the economy holds up, bankers say.

January 23, 2000|By Bill Atkinson | Bill Atkinson,Sun Staff

As the economy goes, so goes the banking industry.

And if it holds up this year, bankers expect another year of big profits, few loan problems and strong growth.

"We feel good about how we are going into 2000," said William Couper, president of greater Baltimore Bank of America. "I am not sitting here with any big concerns."

Peter M. Martin, chairman of Provident Bankshares Corp., agrees.

"If I believe all of the newspapers, I don't have any concerns," he said. "Everybody is saying how the economy is going to continue going strong."

But bankers and analysts don't expect a year without bumps. Some argue that industry profits, which have been growing at a record pace, could suffer.

The reasons:

* Additional interest rate increases by the Federal Reserve Board could slow down the economy and weaken banks' overall business.

* Competition for loans, whether they are for auto, home or construction, has intensified and could squeeze margins.

* Deposit growth could slow as money continues to pour into the hottest game around -- the stock market.

"We are saying it is going to be a more challenging environment," said Christopher M. Mutascio, a banking analyst at Legg Mason Wood Walker Inc.

George Freibert, chairman of Professional Bank Services Inc., a Louisville-based bank consulting firm, expects banks to encounter stiff competition from firms that do business over the Internet.

He said banks are "going to have to work harder and compete better."

"The consumer has always had the ability to shop for the best rate -- now it can be done so expeditiously through the Internet," he said. "Of course, this is causing financial institutions to be pressed to match this pricing."

Another worry going into the year is whether the Fed will raise interest rates, making business tougher by slowing down the economy.

The Fed raised them three times last year, and many economists expect further rate increases this year.

"We have always been creatures of the pond we swim in," Couper said. "If the economy is good, the banks are in pretty good shape. If the economy is not, it has been tough."

The strong economy has been good for the banking industry.

Banks made a record $19.4 billion in the third quarter, up 29 percent from the corresponding period in 1998, according to the most recent Federal Deposit Insurance Corp. data.

And for the first nine months of last year, they made a record $54.4 billion, up 16 percent from the nine-month period in 1998.

Even bank failures have been few and far between. Last year, eight small banks failed, compared with three failures in 1998. Those numbers pale by comparison to 1988 and 1989, when 406 banks failed in the two-year period.

Although banks are highly profitable, their stock prices have languished, putting a damper on mergers and acquisitions even though the Glass-Steagall Act has been repealed.

Experts believe that rolling back the law that prevented banks, insurance companies and brokerages from getting into one another's businesses will spark a frenzy of mergers.

"The near-term opportunities that should have resulted from the repeal of Glass-Steagall have been thrown into a cold shower by the stock market activity that we have seen," said Gerard S. Cassidy, a banking analyst at Tucker Anthony Cleary Gull in Portland, Maine. "What we need to see happen is the acquirers' stock prices go up so they have the currency."

Despite the challenges, many bankers remain optimistic that the year will be a good one.

Robert A. Williams , president of Harbor Federal Savings Bank, said his business is humming. The bank makes home loans and lends to small home builders.

"This real estate market just continues to roll and -- the prices on the stuff [new homes] is getting astronomical," said Williams, whose bank has $255.8 million in assets. "It is amazing. I don't know where the money is coming from."

His biggest worry is the climbing stock market, which has lured some depositors away from the bank, he said.

"If there is a pretty good dip in the market, some of that money is going to come back," Williams said. "But I scratch my head insofar as how high is high with the stock market."

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.