Banks Earn Near-Record Profits for Second Quarter

Second-quarter profits for the nation’s banks may equal the industry’s record $7.6 billion earned in the first three months of 1992, analysts said.

But the strong earnings are partly the result of banks lowering the rates they pay depositors faster than the rates they charge borrowers. And the earnings gains may be short-lived.

A quarterly profit equaling this year’s first three months would be 65% higher than last year’s second quarter, when bank profits totaled $4.6 billion. Declining short-term interest rates and a brighter outlook for bad debts helped the nation’s biggest banks, such as Citicorp, BankAmerica Corp., Chemical Banking Corp., NationsBank Corp., J. P. Morgan & Co., Bankers Trust New York Corp., First Chicago Corp. and Chase Manhattan Corp.

“Right now, everything that could go right is going right,” said Reid Nagle, an analyst at SNL Securities.

Nevertheless, the earnings bonanza may be over. Short-term interest rates are not expected to drop much more. Bad loans will continue to mount until the economy revives. Earnings growth probably will decline later this year, analysts said.

In addition, demand for new loans, which fueled bank profits in the 1980s, is sluggish. Commercial and industrial loans by New York’s eight major banks have declined 13% since June, 1991, to $48.1 billion, according to the Federal Reserve Bank of New York.

“Record earnings are not part of a long-term sustainable return to profitability. The banking industry is in a secular decline,” Nagle said.

Analysts said bank earnings will be buoyed in the second quarter by cost-cutting, lower interest rates and slowing growth in bad loans.

Cost-cutting at Chemical Banking, BankAmerica and NationsBank will come from firing thousands of workers and closing branches. Chemical expects $800 million in cost savings in the next three years. BankAmerica plans to cut costs by $1.2 billion. NationsBank is to reduce expenses by at least $450 million.

Charges against earnings for bad loans peaked for most banks and probably will decline later this year, analysts said.