Mercantile CEO vows no big risks for profits

`Growth is a challenge' in banking, Kelly says

April 25, 2002|By William Patalon III | William Patalon III,SUN STAFF

Mercantile Bankshares Corp. faces a second challenging year in 2002, but won't take inordinate risks in the pursuit of profits, Mercantile President and Chief Executive Officer Edward J. Kelly III told shareholders at the bank's annual shareholders meeting yesterday.

"Growth is a challenge for everyone in the financial services industry," Kelly said at the bank's downtown headquarters. "We at Mercantile, as has been the case historically, are not inclined to reach for that growth on the commercial banking front. Our sense is that reaching for growth ... involves risks that are unacceptable and inconsistent with the steady, solid growth that Mercantile has been able to achieve over the years."

Last year, the Baltimore-based bank reported its 26th straight year of increased earnings and 25th consecutive year of increased dividend payouts. Mercantile announced last week that net income declined by a nominal 0.4 percent in the first quarter, while earnings per share rose 1.5 percent.

Kelly told stockholders that two obstacles are blocking Mercantile's return to "steady" profit growth: a lackluster economy and low interest rates.

For a bank, increased lending is a key to profit growth, but the pace of loan growth depends on the U.S. economy's health, Kelly said. Until the economy accelerates, area companies will hold back on the big-ticket purchases they often finance with money borrowed from their local bank.

"Notwithstanding those who suggest that there may be a quick recovery in store, the economy still seems very soft to us, and my suspicion is that [slow growth] may persist for the next couple of quarters," Kelly said. "Loan growth, as you know, is at the core of our business. Commercial lending is, in fact, what we do and what we do best. And to the extent that there is a slow economy and there is low capital investment [by Mercantile's corporate customers], that is going to impede growth for us, as well."

The likelihood of profit-boosting interest-rate increases isn't any better, said Kelly.

Eleven rate cuts last year by the Federal Reserve dropped short-term interest rates down to 40-year lows - where most banks fare poorly because their profit margins get squeezed.

Early this year, economists predicted the Fed would have to raise rates as the economy improved. Since the economy didn't improve, interest rates haven't risen, Kelly said.

"We are very much helped by rising rates, but I suspect ... to the extent that there is a slow economy and there is low capital investment, that is going to impede growth for us, as well," he said.

Mercantile isn't standing pat, however. It's brought in outsiders to build up its underperforming wealthy client business. Kelly has said the expansion of this business will help Mercantile's overall profitability.

Shares of Mercantile closed at $41.75 yesterday, up 8 cents.

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