This year shapes up as a reasonably good one for bank profits. Yet uncertainties over the depth of the recession and the course of interest rates make analysts more chary than usual of firm forecasts.
"We feel the industry will come through rather well, even though the economy is not booming or in a bust and the interest rate environment is difficult," said Richard Stillinger, vice president of Keefe, Bruyette & Woods, Inc. "Banks learned their lessons in 1980; they now pay close attention to matching their assets and liabilities."
Keefe, which tracks 120 leading banks, projects that earnings in 1982 could increase by roughly 10 to 12 percent, or slightly faster than 1981's pace of 9 to 11 percent. Last year's earnings were affected by volatile interest rates, the costs of interest-bearing checking accounts and a rise in nonperforming assets as some loans turned sour in the second half of the year.
The Keefe forecast assumes a continuing moderation in interest rates resulting in average spreads no narrower than in 1981. It also assumes that the recession will not be severe. If it does deepen, earnings could grow at a slower pace because loan demand will be smaller and loss provisions higher.
Keefe predicts that in the District, American Security Corp. profits will rise 10 percent this year, compared with 10.8 percent in 1981, and that Riggs National Bank's profits will grow 5.9 percent versus 4.6 percent.
In Maryland, Equitable Bancorp's earnings growth should be the same as in 1981, 21.4 percent versus 21.2 percent, while slippage is seen for the profit rise at First Maryland Bancorp (4.3 versus 5.4 percent) and Maryland National (10 percent versus 11.9 percent). But Suburban Bankcorp profits are expected to jump 9.3 percent compared with a 3.9 percent gain in 1981.
In Virginia, Keefe makes the following profit growth projections: Bank of Virginia, 12.7 percent versus 14.6 percent in 1981; Dominion Bankshares Corp, 8.9 percent compared with 2.6 percent; First & Merchants Corp., 8.2 and 8.9 percent; United Virginia Bankshares, 7.2 percent from 8.7 percent, and Virginia National Bankshares, 8.8 percent versus 19.4 percent.
The commercial banking industry had profits of $20 billion last year, according to Data Resources Inc., a Boston consulting firm. Savings banks and savings and loans, on the other hand, are estimated to have lost more than $5 billion. Analyst Judy Mackey of Townsend-Greenspan Inc. estimates that the thrift industry will turn around in 1982, provided interest rates fall to 9 percent and hold there for some time.
The mutual fund industry grew 70 percent last year, primarily because of the large expansion of money market funds. These increased their assets from $77 billion to $187 billion in one year. David Silver, president of the Investment Company Institute--the trade association for mutual funds--thinks growth will be more moderate this year if interest rates stay at current levels. The funds will spurt if rates rise, unless, Silver said, banks and thrifts come out with new deposit instruments to compete with money funds.
Though it may not be an excessively profitable year for financial institutions, it promises to be an interesting one. As George Parker of Stanford's Graduate School of Business wrote in the Harvard Business Review, "Banking is poised for the beginning of a new competitive era. . . All fundamental characteristics of the industry have become victims of regulatory reform and technological change . . . There will be a new batch of winners and losers . . . "
On the legislative front, the pace of deregulation--or homogeonization--of the banking industry will be determined by percentages and politics. When Congress returns, the banking committees in both houses will face anew the question of whether to pass emergency legislation to help the ailing thrifts or whether to try to hammer out a comprehensive bill effecting major changes in financial institutions. If interest rates are declining, the pressure will be off to pass stop-gap legislation rather than looking at the longer term.
The bill before the Senate committee would generally permit savings and loans to become more like commercial banks and let banks draw a little closer to the securities industry.
The administration has proposed a plan whereby banks could sell mutual funds and municipal revenue bonds through subsidiaries under the same regulations as brokers. However, a full-scale review of the Glass Steagall Act, the law that separates commercial from investment banking, is not expected in 1982, according to Senate Banking Committee Chairman Jake Garn (R-Utah), because the issue is too sensitive for an election year. Meanwhile, several large banks have decided to test the waters by purchasing securities firms on their own.
Another politically sensitive issue that may also be delayed is revision of the law prohibiting bank holding companies from acquiring banks in other states. And when legislators get around to it, they may find themselves ratifying de facto interstate branching. This is being rapidly accomplished through electronic transfer systems among regional banks, as well as through foreign business (Edge Act) and loan production offices set up by money center banks. In addition, a number of large banks have already invested in banks in other states in anticipation of the day when they can acquire them outright.