Pay no attention to the man behind the curtain... our loans are FINE, and bank stocks are strong:
Bad Loans Have Bankers Facing a Difficult Year;
Bank Stocks Already Slipping
Source: Knight Ridder/Tribune Business News
Publication date: 2000-12-24
Arrival time: 2000-12-26
Dec. 24--For much of the '90s, U.S. consumers and corporations spent
money freely and were able to borrow what they didn't have on hand. Much of
the population felt secure, even pampered, and the nation's banks thrived on
that prosperity.
Earnings looked great, stock prices were glowing, and the world was a
happy place for those bankers who avoided merger-related layoffs. Even the
mergers, most of them financed by highflying stocks, were a sign of good
times in the industry.
But times have changed.
As the economy slows, borrowers' astronomical debt loads--more than $15
trillion in corporate and consumer debt, or roughly twice the nation's gross
domestic product--may fast become an albatross.
Banks, already stumbling on sizable bad loans they made during the boom
times, are facing their most difficult year since the recession of the early
'90s. Many will spend 2001 crawling out of a credit quality ditch and trying to
convince investors that their loan portfolios are clean again.
For now, past-due loans and charge-offs are climbing steadily. In the third
quarter, 0.7 percent of the banking industry's assets represented loans at
least 90 days past due, up from 0.6 percent in 1999. Although it may seem
like a small increase, it represents billions of dollars in overdue loans.
Bank stock prices have fallen already. The widely followed Keefe, Bruyette
and Woods bank index hit its high point for the year in mid-September, and
has fallen 2.9 percent since. The Standard & Poor's index of major banks
has slid even further, dropping more than 20 percent below its 52-week high.
Individual banks already are suffering from bad loans: Earlier this month,
fallout from one bad loan--reportedly to Sunbeam Corp.--battered
Charlotte-based First Union and Bank of America. Bank of America said its
fourth-quarter earnings would fall far short of expectations, in part because of
the corporate loan losses, and other banks have since followed with profit
warnings of their own.
Experts say the picture is not likely to brighten until the end of 2001.
"It will be the most difficult year banks have faced since the 1990-91
recession, but I think they'll weather it better," said Hal Schroeder, portfolio
manager for financial services stocks at Carlson Capital, a Dallas-based
hedge fund.
"It won't be a freight train," he said.
For one thing, although banks face intense competition, technology is
making them vastly more efficient. It helps them do everything from
determining how much risk they are taking in their loan portfolios to providing
24-hour access for customers who want to reach banks--by phone or
online--at their convenience.
Regulators also have become smarter about handling credit quality
problems, Schroeder said.
"Last time, they were kind of late to the party in terms of identifying the
credit quality issues, and when they did identify them, they slammed on the
brakes and threw everybody through the windshield," he said.
This time, bank regulators from Federal Reserve Chairman Alan Greenspan
to Federal Deposit Insurance Corp. Chairman Donna Tanoue have warned
banks to be careful about the loans they make. They have been sounding
alarms for more than a year, cautioning banks not to become careless with
lending in the strong economy.
Now that problems have surfaced, regulators are trying to keep credit flowing
while still shoring up credit quality.
And the Fed, which has kept interest rates far below their levels leading into
the last recession, seems increasingly willing to ease rates as the threat of
recession looms, something that could make 2001 considerably easier for
banks.
If the Fed lowers rates, "and the loan problem is gone by late 2001, then
2002 could be set up as a good earnings comeback year," said Nancy Bush,
a bank analyst at Prudential Securities in New York.
"The stocks will start to discount that possibility at least six months ahead
of time, so by mid-2001 stocks could shrug off a good bit of this concern
about credit quality," she said.
All bets are off, Bush said, if banks continued to make bad loans beyond the
1996 to 1998 period that led to the most recent losses. If the bad loans were
limited to that time, then "this is not a bottomless pit," she said.
For now, banks' credit quality problems are dwarfed by the staggering losses
of the early '90s, when past-due loans compared to assets reached into the
3 percent range, according to the FDIC.
In the third quarter--the worst so far this year--past-due loans were 0.7
percent of assets. This year marks the first uptick since 1991.
"We have a long way to go before we're anywhere close to the early '90s,"
said Kevin Brown, senior financial analyst in the FDIC's research division.
Brown said it would be naïve to expect banks to continue their run of stellar
credit quality.
"It's been like perfect weather for boating. How often does that happen?" he
said.
The weather is still fairly temperate for small community banks, whose
stocks have been beaten down despite the fact they have not had the same
degree of loan problems as their larger brethren.
The small banks also have posted bottom-line improvements despite a rising
interest rate environment, according to a recent report on community banks
from Howe Barnes Investments Inc.
"We attribute this to better revenue diversification, close attention to expense
controls and a sharp eye on credit quality," the report said.
Because of the wall larger banks have hit with technology and other
improvements, Schroeder said he believes another wave of bank acquisitions
is coming. The prices will be lower this time, though, because the stock
prices are lower.
"The heyday for bank acquisitions for the seller is not going to return,"
Schroeder said.
He doubts that many midsize banks will be acquiring larger banks, which
has happened in recent years when some larger banks ran into trouble and
could not salvage their stock prices.
"Bigger banks are at a competitive advantage in management knowledge,
technology and funding, three reasons larger banks continue to be in a better
position to buy smaller banks," he said.
One potential buyer is Chicago-based Bank One Corp., particularly if you
look to 2002, said Bert Ely, a bank consultant in Alexandria, Va.
The coming year could be easier on Bank One--which has already endured
earnings problems after being assembled in a massive 1998 merger--than on
some banks whose problems are just now surfacing, he said.
"They may have a tougher go of it than Bank One, where we think most of
the bad news has been out there for some time," Ely said.
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