Posted on: Monday, February 25, 2002

Rate cuts boost profits for banks

By Michael Nol
Bloomberg News Service

NEW YORK — Steve Lopez, a manager at a New York lingerie maker, got a telemarketer's offer in January he couldn't turn down: 2.25 percentage points off his 8.25 percent student loan. The new loan will save him $70 a month on a $48,800 balance.

The deal is even better for the bank that grabbed his business. Its borrowing costs, after 11 Federal Reserve interest-rate cuts in 2001, have fallen as low as 1.75 percent for overnight loans.

Not since the second quarter of 1997 have banks enjoyed such fat margins — 4.1 percentage points — between their cost of money and the interest rates they charge customers.

"It's like a gift," said William C. Field, an analyst who covers bank shares for Pioneer Investment Management in Boston, which oversees $20 billion in assets. With falling rates, banks "are just going to make money."

Banks are benefiting from consumers who refinanced home, car and other debts at a record pace in 2001. The largest savings and loan, Washington Mutual, saw profit rise 64 percent as it lent $156 billion to homebuyers, more than double in 2000.

For some big U.S. banks, which also lend to companies and countries, times are harder. The $605 million profit that Citigroup Inc.'s consumer unit earned in 2001 was wiped out by the biggest financial services firm's $698 million write-off for losses on loans to Argentina and energy trader Enron Corp.

The 20 biggest U.S. banks' profit fell an average of 12 percent last year, according to Thomson Financial/First Call. The next largest 43 banks, those that focused on consumer lending, posted an average 6 percent gain.

"It was not such a bad thing to be a mid-size bank," said Bob Maneri, a bank analyst for Victory Capital Management, which has $72 billion in assets. Smaller banks "took in deposits and lent money. They didn't get involved in Enron and Argentina."

Credit card companies also had it good. Average variable credit-card rates fell 3.6 percentage points last year, according to BankRate Inc. At the same time, the rate at which issuers borrow fell 4.49 percentage points.

On the $538 billion of U.S. credit-card loans outstanding at the end of 2001, that 0.89 percentage point advantage translated to a $12.8 million rise in daily interest income for issuers in the year.