Bankers' Touch

Boomlet for moneymen

High and volatile interest rates are not very helpful to most businesses, but many banks seem to make out just fine when money is expensive. That at least is one interpretation of the industry's impressive third-quarter earnings reports. After a ho-hum second quarter, profits have perked up; and for 56 of the nation's largest commercial banks, earnings have climbed by a brisk 18.2% over the same period last year, one of the largest such gains of any major business sector in the economy.

The surge was by no means uniform, but it came, remarkably enough, amid signs of a slowing economy. Last week, for example, General Motors said it had lost a stunning $468 million during the third quarter. The Chase Manhattan Corp. of New York, however, reported a jump of 20.1% per share in third-quarter profits. Total quarterly earnings were $116.1 million, the highest in Chase's 182-year history. Bankers Trust and Chicago's Continental Illinois did almost as well, with respective increases of 15.6% and 16.4%. The biggest rise of all, 227%, was racked up by First Chicago Corp., which had suffered a severe profits squeeze during its third quarter one year ago.

By contrast, declines in actual earnings were reported by the nation's two largest banks, New York-based Citicorp (off 11.6%) and California's BankAmerica, which suffered a 33.3% drop in profits during the period. Fifth-ranked J.P. Morgan & Co. also slipped, with a decline of 26.7% from the year-earlier period.

In general, banks that specialize in consumer lending have suffered most under the high rates, while those that rely on commercial or corporate borrowers have profited handsomely. One reason is that consumer loans are typically made at interest rates that do not fluctuate. At times of rising interest rates, profits of banks are squeezed by their portfolios' low-yielding loans. Fixed-rate loans have helped to drag down profits at Bank-America, for example, which has some 1,100 branches spread throughout the nation's most populous state. On the other hand, the sky-high rates have devastated the corporate bond market, where major businesses traditionally turn for financing, and forced companies to try to scrape by on short-term credit from banks like Bankers Trust and Chase, which have aggressively sought corporate business. Nationwide, short-term commercial debt has risen by 26.1% in the past six months.

Local and regional banks have also done well. Typical are Houston's Allied Bancshares, which reported a 38% increase in third-quarter earnings, as well as Georgia's First Atlanta Corp., which expects at least a 40% increase for all of 1981.

With interest rates volatile, banks everywhere have been under heavy pressure to anticipate which way rates will move next. Some of the big money center banks bet right in the third quarter, and were able to profit from a September dip in the cost of borrowing short-term funds from the federal funds market. Others avoided betting altogether by hedging: for example, by matching their own borrowing against the loans they make and by not locking in long-term loans to fixed interest rates. Says Mark Flannery, assistant professor of finance at the University of Pennsylvania's Wharton School, in Philadelphia: "The evidence is that banks are either quite well hedged against interest rate changes or could make themselves so if they wished. I've always been very unsympathetic to bankers' claims that volatile interest rates are killing them." With the earnings of the industry as a whole so buoyant, cries of pain and suffering just do not seem convincing. -

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