Following heady days, the banking world becomes very different place

By Scott Bernard Nelson, Globe Staff, 5/21/2002

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uring the final heady days of the 1990s bull market, the prevailing wisdom among financial services gadflies was that plain-vanilla retail banking was a goner. To survive and grow in the new economy, the argument went, publicly traded banks needed to diversify their revenue streams into venture capital, investment banking, and stock brokerage businesses.

In 1999, almost at the peak of the mania, FleetBoston Financial Corp. bought crosstown rival BankBoston Corp., in the largest and most closely watched bank merger in the region's history. One of the biggest driving factors for the marriage was that Fleet wanted BankBoston's sexy venture capital and overseas banking operations.

Fast-forward three years, though, and the banking world is a very different place. Fleet announced plans this spring to sell off or pare back most of the nontraditional units it acquired with the BankBoston deal. And just as in 1999, Fleet's decision captured the zeitgeist of the industry. With the economy no longer soaring, in short, simple was back in style.

"Basic banking was definitely a better place to be in 2001," said Bryan Texeira, chief financial officer at Boston's Eastern Bank. "Mortgage loans, checking accounts, savings accounts, that's what made money for banks. Venture capital and investment banking did not."

Not surprisingly, the state's smaller banks -- which never had the resources to get into all those far-flung nonbanking ventures to begin with -- performed best in the old-is-new-again environment.

The top-performing bank in The Globe 100 rankings, Waltham-based Microfinancial Inc., isn't really a bank at all. Microfinancial doesn't do general banking, but only provides loans and leases for purchases between $500 and $10,000, or the type of small-ticket lending that held up well last year while multimillion-dollar loans to big corporations increasingly went south.

The rest of the 10 top-performing banks, though, are small full-service banks. Some, such as Capital Crossing Bank, specialize in a niche while still offering a full range of services. None has more than $2.2 billion worth of assets, which pales in comparison to the nearly $200 billion at Fleet.

"Even smaller banks typically have a trust department, which probably didn't do so well last year, and they all faced a sluggish loan environment," said Steve Wharton, an industry analyst at Loomis Sayles & Co. The slowing economy and the reversal on interest-rate policy it spawned at the Federal Reserve Board did drive down the cost of all banks' raw material: money. And falling stock prices tied to the economic slowdown convinced a larger number of Americans to park their cash in banks rather than in the financial markets, driving up deposit levels.

On the other hand, the newly uncertain environment made lending a lot trickier for the people who manage banks. The falling interest rates also squeezed banks by reducing the rates at which they could lend money.

As US businesses began to feel the pinch, some stopped paying back their loans. That trend made the level of nonperforming loans at banks start to inch upward, hitting heights that had not been seen for a couple of years. The effect was most pronounced in big corporate loans that are syndicated -- or shared by multiple banks -- something in which only large banks generally participate.

As the midpoint of 2002 approaches, the question now for bankers is whether they've weathered the worst of the storm.

If the economy starts to improve, credit quality gets better, and people and businesses start borrowing more money, banks will benefit. And if Wall Street makes a comeback, then big banks with major investment divisions will gain from that, too.

But not everybody is convinced the economy or the banks that depend on it are out of the woods.

"Banks are generally only going to do as well as their customers," said Texeira, of Eastern Bank. "People are still taking a little bit of a wait-and-see approach to the economy and whether it's on the way back up."

Scott Bernard Nelson can be reached at nelson@globe.com.