Six of the nation's leading banks reported earnings gains in the second quarter on the strength of lower interest rates and healthy investment income.
Profit at Citicorp, the country's biggest bank holding company, rose 22%, while Security Pacific, Wells Fargo, Crocker Bank, Manufacturers Hanover and Mellon Bank posted earnings improvements between 15% and 73%.
The banks' profits rose because of gains from securities trading and favorable spreads between their cost of money and the rates that their borrowers are paying. But the higher income was dampened in part by continuing high loan losses.
Analysts were bullish on the banking business generally, which is benefiting from low interest rates and negligible inflation.
"It's hard to generalize about an industry, but I've been raising my (full-year) earnings estimates consistently," said James Carter of Merrill Lynch. "The earnings are going to be fantastic."
High Loan Charge-Offs
"Margins are good everywhere. Bond trading and foreign exchange were very strong," said Lawrence Cohn, chief bank-stock analyst at Dean Witter Reynolds. "But partially offsetting those, the industry salted away a fair amount for a rainy day by taking large loan-loss provisions. Loan charge-offs continued at the high levels they've been at for the past year or so."
New York-based Citicorp said it made $251 million in the second quarter, compared to $206 million a year ago. The bank attributed the rise to strong fee income from credit cards and other consumer loans, as well as improved results from trading in stocks, bonds and foreign currencies.
For the first six months of the year, net income was $528 million, up 23% over the same period a year ago.
Citicorp set aside $121 million for possible loan losses in the second quarter, compared to $57 million in the second quarter of 1984. The loan-loss fund grew to a total of $652 million from $547 a year earlier.
Citicorp's total assets as June 30 were $159.6 billion, making it by far the nation's largest banking concern.
Three major California banks also reported improved profits, although ailing Crocker Bank did only slightly better than break even for the second straight quarter.
Crocker, the country's 16th-largest banking firm, said it earned $9.6 million in 1985's second quarter, compared to $6 million a year ago and $8.6 million in the first three months of this year. The first-half performance was a considerable improvement over the same period in 1984, with a net gain of $18.2 million, contrasted with 1984 losses of $115 million.
"The improvement reflects higher net interest income as well as the effect of lower interest rates on securities," Crocker Chairman Frank V. Cahouet said.
The bank added $26 million to its loan-loss reserve, compared to $20 million a year earlier. On June 30, Crocker had $1.07 billion in non-performing loans, amounting to 8.2% of its total loans, more than twice the average rate of the nation's major banks.
During the second quarter, the acquisition of Crocker by London-based Midland Bank PLC was completed.
Los Angeles-based Security Pacific, the nation's ninth-largest bank holding company, posted second-quarter profits of $79.6 million, up 15.5% from the $68.6 million that it earned a year ago.
"Lower interest rates and continued recovery in several important sectors of the economy favorably influenced our earnings performance, despite continued weakness in the energy and agricultural industries," said Richard J. Flamson III, the bank's chairman.
Security Pacific added $67.9 million to its reserve for bad loans, compared to $49.8 million in last year's second quarter. Total assets rose 12% to $47.9 billion.
The second quarter was also healthy at 13th-ranked Wells Fargo, based in San Francisco, which showed a profit of $47.5 million, up 26% from the year-ago period.
Wells Fargo Chairman Carl E. Reichardt attributed the improvement to more favorable spreads between lending and deposit rates, higher loan volume and smaller increases in operating expenses.
Loan losses held steady, with additions to the loss provision of $48.6 million, compared to $48.4 million a year ago. Non-performing loans and foreclosed real estate also increased only slightly.
33% Gain in Quarter
New York-based Manufacturers Hanover, the nation's fourth-largest banking company, reported a second-quarter profit of $98.5 million, compared to $73.7 million a year earlier, a 33.6% gain.
The bank doubled its quarterly loan-loss provision, however, setting aside $161 million this year, compared to $80.6 million a year ago.
Its net interest revenue rose 18.3%, while revenue from other activities, including securities and foreign exchange trading, rose 47%.
Pittsburgh-based Mellon Bank, the nation's 11th largest, said its second-quarter profit jumped 73% to $68.1 million.
Chairman J. David Barnes said the profit gains "reflected unusually large gains from securities trading and portfolio management."