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BusinessWeek: January 10, 2000 |
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Industry Outlook 2000 -- Finance
Banking
But despite that strong showing in 1999, there are storm clouds blowing. Three rate hikes by the Federal Reserve since last June--and the prospect of one or two more--are starting to crimp margins at many banks. The effect is all the more pronounced because many banks, having run through their deposit bases, have been forced to turn to higher-cost borrowed funds just to finance new loans. According to SNL Securities, the loan-to-deposit ratio at the nation's 15 largest banks has risen to 105%, up from just 88% in 1993. And the ratio runs as high as 140% at banks such as Comerica Inc. and KeyCorp. Fed hikes are also putting a damper on some of the banks' hottest markets. The Mortgage Bankers Assn. predicts that mortgage activity will decline by nearly a quarter by the end of 2000--a development that is squeezing earnings at many regional banks, including First Union, SunTrust Banks, and Huntington Bancshares. LOOMING LOSSES. But the bigger risk to the industry's prosperity may be self-induced: The lending boom of recent years is producing a sharp rise in troubled loans, a development that normally doesn't show up until the economy slides into recession. Analysts blame the liberal credit standards of recent years. Loan losses, as a share of all outstanding loans, have already risen from 0.45% to 0.79% over the past two years. The number is heading upwards--and could hit 1.20%, Mayo warns, if the economy tips into recession. Says Washington banking consultant Bert Ely: "There's a lot of sludge on bank balance sheets that hasn't been accounted for." For their part, bankers maintain that these concerns are overblown. "As the economy slows, we will see loan losses rise, but I don't think it will be a serious problem," says L. M. "Bud" Baker Jr., chairman of Wachovia Corp., a North Carolina bank. "The quality of most loans I see is still pretty good." Even so, the reserves that banks set aside to cover bad loans are at their lowest level since 1986, so many banks could feel pressure from regulators to bolster those reserves at the expense of profits. Under the best scenario, Mayo predicts these emerging pressures could cut the industry's profit growth in 2000 to around 9%--and to 6% after factoring out one-time gains. In a slowing economy, banks could see their profits fall further--if those shaky loans come a cropper. Against this gloom, Bank One, First Union Corp., U.S. Bancorp, and National City have all guided analysts to lower their forecasts for 2000. Other banks may follow, say analysts, who seem especially worried by the industry's increasing reliance on one-time gains. All told, the eight largest banks used $2 billion in gains from venture-capital investments in the third quarter alone. Many on Wall Street are quick to note that the industry's plight isn't nearly so dire as in the early 1990s, when a flood of soured real estate loans created the most bank failures since the 1930s. Thanks to the banks' success in diversifying their income stream away from the volatile lending business and into fee-based businesses such as mutual funds, "the industry's capacity to absorb bad credits is much more robust than 10 years ago," says David S. Berry, research director at Keefe Bruyette & Woods Inc., a New York research firm. But for an industry now reveling in record profits, the fall back to earth could still be hard. Return to top | |
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  Return to top TABLE Positives and Negatives POSITIVES -- Glass-Steagall repeal sets stage for merger mania between banks, insurers, and brokerages, with banks likely victors. -- Continued strong growth and low inflation should support more lending activity despite higher rates. NEGATIVES -- Credit problems are creeping up. Regulators are likely to demand that banks boost capital and write off bad loans. Both moves would cut profits. -- Political backlash to ATM surcharges could cut one of the industry's best sources of fee income. Return to top |
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