Good news i suppose if we wonder why lowering interest hasn't increased demand at least we can now tally that up to the over exuberance period of sitting in pink as we are now in the preparing for red period.
washingtonpost.com
Banks' Profits Cut By Problem Loans
Reserves Build to Cover Expected Losses
_____Industry Watch_____
By Kathleen Day
Washington Post Staff Writer
Friday, November 30, 2001; Page E03
Earnings for the nation's banks dropped nearly 10 percent in the third quarter because of the largest increase in expected loan losses in more than a decade, regulators said yesterday.
Thesharp rise in new loan-loss reserves -- up 70 percent from a year ago -- reflects a growth in problem borrowing, mostly by businesses, and is the result of lax lending policies by bankers two to three years ago, said officials at the Federal Deposit Insurance Corp., which insures bank deposits.
Thus, problems stemming from the current recession -- which a panel of economists said began in March -- won't be reflected in loan-loss numbers until next quarter or next year, the regulators said.
The dip in earnings can be partly attributed to losses from the Sept. 11 terrorist attacks, with more expected to be reported in the fourth quarter.
The country's 8,178 banks reported $17.4 billion in earnings for the quarter ended Sept. 30, according to the FDIC's quarterly survey. The findings are another sign that bank profitability is slowing and that regulators' warnings about loose credit standards have been confirmed.
Regulators said the results contain two bright spots: Banks are recognizing and setting aside money for potential losses more quickly than they did a decade ago, and the industry is in better shape to withstand a downturn than it was in 1990, when it entered a recession in weak condition.
"Today's results are not surprising," FDIC Chairman Don Powell saidin an interview yesterday. "What would be disappointing is if the industry weren't reacting." An $11.6 billion increase in loan-loss reserves -- the cushion against future losses -- is evidence banks are dealing with their problems, he said. The increase was the largest quarterly boost to reserves since 1990.
Also encouraging, he said, is the strong position banks are in after a decade of record profits, giving them a fatter capital cushion to absorb future losses from the terrorist attacks and the economic downturn.
"Capital is forgiving," Powell said. "Capital overcomes lots of sins."
Most of the decline in third-quarter earnings came from larger banks, defined as those with assets of $1 billion or more. About one-third of all banks saw an increase in problems in business loans.
But those institutions are mostly larger companies and account for the majority of all such loans -- about two-thirds -- so the uptick is significant, the FDIC researchers who prepared the survey said.
Larger banks did see some improvement in their profit margins on loans, regulators said, but that was not enough to overcomethe rise in costs for problem loans.
Banks increase their loan-loss reserves -- which must be subtracted from profits -- as soon as they can reasonably estimate what the losses will be.
The nation's biggest banks -- the 80 with more than $10 billion in assets -- have diversified away from the loan business, regulators said.
A decade ago, the nation's biggest banks received more than 65 percent of their income from interest paid to them on loans. Today it's slightly more than 50 percent, with fees from automated teller machines and other transactions making up the rest, officials said.
The steepest quarterly decline in bank industry earnings in a decade was in the second quarter of 2000, when profits fell 13.4 percent from a year earlier. That drop was largely the result of higher loan and restructuring costs at three large banks -- First Union Corp. of Charlotte and Wachovia Corp. of Winston-Salem, N.C., which have since merged, and Bank One Corp. of Chicago.
Before that, the largest quarterly drop was in the second quarter of 1991, during the last recession, when earnings fell 10.2 percent from the previous year.
The decline in the most recent quarter is more widespread, regulators said, but still mostly concentrated among larger banks. More than a third of the 80 largest banks had a decline in earnings, regulators said.
Quarterly profits rose at about 55 percent of all banks, most of them smaller banks, those with assets of less than $1 billion. But small banks saw continued pressure on their profit margins on loans, which could translate into lower earnings later, FDIC officials said.
In the last two years, regulators have highlighted credit problems in several industries, including the technology, health-care and manufacturing sectors.
In recent weeks, financial trouble in the airline, automobile and hotel and travel industries has made headlines.
"Like the rest of the economy, banks are feeling the effects of the recession, as well as the aftershocks of the terrorist attacks," Powell said.
"No one can forecast the duration of a recession, however. Obviously, the longer this one lasts, the more stress it will put on the entire economy, including the banking industry." |
