The nation's major banking companies, which had a record 27 percent increase in earnings last year, will have a solid profit increase of about 15 percent this year, according to a study by the investment banking firm, Salomon Brothers.
However, the study cautions, loan growth again outstripped the additions that banks made to their capital base.
With loans swelling 16 percent last year - from $300.7 billion to $343.8 billion - the ratio of equity capital to loans fell to 7.5 percent from 8 percent.
The study says it expects the capital-loans ratio to fall further this year, "likely piercing the previous low of 7.4 percent reached in 1974."
The capital base of a bank - shareholder equity plus retained earnings - is the final protection a bank has against a surge of bad loans.
Bank regulators do not like to see the ratio of capital to loans get too low although the definition of "too low" varies from bank to bank.
"in the current inflationary environment continuing rapid credit expansion threatens to propel equity leverage to new heights, a prospect which must be regarded with concern not only by the regulatory agencies but by investor and bank management as well," Salomon Brothers said.
Because banks stocks are traded so low, bank managements are reluctant to sell equities to add to their capital base.
The study noted that the fundamental protection against bad loans, however, is earnings and at the same time that bank earnings are climbing bad loans are declining. Many banks have made a conscious effort to upgrade the quality of their loans after having bad experiences in 1974 and 1975, especially with real estate loans.
The Salomon Brotheer study covers 35 large bank holding companies whose year-end 1978 assets ranged from $3 billion to $95 billion and who represent about 40 percent of all the banking assets in the nation.
These banks reported first quarter earnings increases of 25 percent, although the study said banks cannot keep up that kind of earnings growth for the year as a whole.
As the cost of borrowing the money they in turn lend out rises and as the economy slows later this year, profits increases for banks will slow. Because of this, the report predicts, for the full year, we look for earnings, to advance 14 percent to 16 percent, an outstanding performance by normal banking standards . . . "
The study said it expects banks to further reduce both loan losses and "nonperforming assets" again this year.