After dismal year, banks, insurers look for road back

January 06, 1991|By Peter H. Frank

Early last year, a Baltimore magazine poll of executives ranked MNC Financial Inc. and USF&G Corp. as the two most financially sound companies in Baltimore.

MNC, parent of Maryland National Bank and American Security Bank in Washington, saw its stock price plummet more than 85 percent during the year as it racked up enormous losses. It recently decided not to pay dividends for the fourth quarter.

USF&G, one of the country's largest insurance companies, cut its dividend by two-thirds and warned that some large layoffs were coming as it searched for ways to save money. Its stock closed down nearly 75 percent for the year.

The chairmen at both companies are gone.

Care to predict what will happen this year?

"Hopefully, not more of the same," said Legg Mason Inc.'s banking analyst, David S. Penn.

No one disputes that 1990 was a terrible year for banking and insurance. After months of nerve-wracking reports that these financial industries were facing something between a brief downturn and economic ruin, the spate of bad news lost most of its ability to shock.

Things were bad all over and getting worse, industry watchers lamented.

Now, it's a new year. But many analysts say privately that they remain shell-shocked. The cumulative effect of the mountainous losses and financial storm clouds has taken its toll, they say.

Despite the onslaught, or possibly because of it, many analysts are hopeful that in 1991, banks and insurers will sort out the problems that surfaced last year and not endure a year filled with new surprises.

However, no one is overly confident that that will be the case.

"Expectations are so low that, if anything, people will be surprised if things don't get worse," Mr. Penn continued. "I think they will, but the mind-set of an average analyst is to expect disaster."

One need only look at a sampling of the nation's biggest banks to see how the industry has suffered over the past year. Real estate loans crumbled, and lending to highly leveraged companies -- mostly the result of costly buyouts financed with the banks' money -- has grown increasingly worrisome.

The story is much the same for insurance companies. While the mechanics of banking and insurance differ, the alarms have been sounded for roughly the same reasons.

Given the realities of the past year, then, most analysts would rather not look back. "We know about the last 12 months," said Denis J. Callaghan, insurance analyst at Alex. Brown Inc.

A quick look at last year's performance for some stocks of local interest helps explain the sentiment:

MNC Financial Inc. 85.3%

John Hanson Savings FSB 84.8%

Second National FSB 75.0%

USF&G Corp. 74.1%

Chase Manhattan Corp. 69.8%

Provident Bankshares Corp. 67.7%

Signet Banking Corp. 67.7%

Baltimore Bancorp 67.6%

Citicorp 56.3%

Crestar Financial Corp. 52.2%

Loyola Capital Corp. 50.0%

Alex. Brown Inc. 22.1%

Mercantile Bankshares Corp. 19.0%

T. Rowe Price Associates Inc. 18.0%

C&S/Sovran 17.8%

Legg Mason Inc. + 5.1%

GEICO Corp. + 6.3%

Given the fact that many of these stocks appear to be in the basement, does that mean they are bargains?

Maybe, but few analysts are recommending they be bought.

"It's too late to sell and too soon to buy," Mr. Callaghan said, referring to USF&G but echoing most other analysts about a range of companies.

The problem is knowing what happens next.

Elisabeth Albert Hayes, a banking analyst at Johnston, Lemon & Co. in Washington, believes real estate is key for the local industry.

"Another six months of the free-fall in real estate values which started at the beginning of 1990 would lead to more bad news for most regional financial institutions," she wrote recently.

"The regional economy depends heavily on the real estate industry, and the degree to which this decline could impact commercial and consumer loan portfolios cannot be dismissed lightly."

While there may be a few bargains out there, she said, "we believe it is too early to bottom-fish in the stocks of troubled banks and thrifts."

One way that analysts gauge what might be coming is by estimating the value of companies after assuming a range of possibilities.

Analysts at Shearson Lehman Brothers did just that recently. By taking into account the types of loans sitting on banks' books, the analysts adjusted their book value -- basically the difference between their assets and liabilities -- based on the riskiness of their loans and the size of their reserves to protect against future loan losses.

Although the loans might still be good and, thus, no losses have resulted from them, the model created by Shearson attempted to value the company based on the likelihood the loans would sour in the future.

While MNC, for example, had a stated book value of $13.69 a share as of Sept. 30, its risk-adjusted book value as figured by Shearson was only $3.80 a share, much closer to its closing price Friday of $3.375.

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