Average profits of Midwestern banks will climb 14 to 16 percent this year over the results reported for 1985, with mergers and acquisitions continuing at a record pace during the year, a Chicago brokerage firm predicts.
The Chicago Corp., which made the forecast in its quarterly Midwest Bank Survey publication, had predicted three months earlier that average profits would rise 10 to 12 percent in 1986 after increasing by 17 percent in 1985 over the preceding year.
Michael E. Sammon, senior vice president and head of the firm`s bank stock division, said he raised the forecast because many banks in the region reported strong results for the first three months of the year.
The firm`s survey of 350 banks showed an average profit increase of 22 percent for the first quarter from the year-earlier period.
”Business for most Midwestern banks has never been better,” he wrote in the firm`s latest report.
He said the strong earnings results were helped by lower interest rates and a ”generally good economy.”
But Sammon also noted that many banks are still struggling with high levels of nonaccrual loans despite their profit increases.
Banks in the Chicago area showed the biggest earnings gains, he said. Banks with assets of $500 million or more posted an average increase of 54 percent for the quarter, while banks with assets below that amount posted average increases of 34 percent.
Other Illinois banks showed an average profit rise of 32 percent, while those in Minnesota rose 27 percent; Ohio, 21 percent; and Iowa, Kentucky and Wisconsin, 19 percent.
The survey showed an average return on assets of 1.02 percent for the group and an average return on equity of 13.8 percent. Both were the highest since the firm started making such studies four years ago, Sammon said.
”Nonaccrual loans remained quite high by historical standards, at an average of 1.49 percent of total loans,” he said. ”Although the nine-state average is somewhat distorted due to problem agricultural loans, even banks with less agricultural concentration have not been very successful in reducing their nonaccrual figures. The average loan-loss reserve now stands at 1.29 percent (of total loans).”
Prices of bank stocks in the region rose an average 14 percent in the quarter and 46 percent over the 12 months through March, reflecting both the strong profits and an accelerating merger pace now that all of the states except Iowa have adopted regional interstate banking laws.
The average price of pending bank mergers and acquisitions rose to 162 percent of book value in the first quarter from 152 percent in the fourth quarter of 1985.
Twenty-six such transactions were completed during the quarter, down slightly from 32 in the fourth quarter of 1985. But a record 125 deals were pending at the end of March, including 30 interstate transactions.
