As the saying goes: Owe a bank $5,000 and you have a problem. Owe it $5 million and the bank has a problem.
The U.S. banking industry in 1991 continues to have more financial problems than a barrel of Donald Trumps. Problem credits will likely peak at the end of this year, but it will take a long time to work them out. Woes tied to leveraged buyouts could be solved within two years, but real estate difficulties may take four to six years. In the meantime, modest single-digit loan growth is expected.
There is even more to worry about. The Federal Deposit Insurance Corp. is nearly out of money, its recapitalization plan to be decided by Congress later this year. If the FDIC had the money now, it would likely shut down 10 banks over $1 billion in size within the next nine months. A taxpayer bailout is possible, but few analysts consider it probable, what with a whopping $219 billion in wealth in the banking system.
Only 8 percent of banks are in the troubled category, the rest getting along all right. The most likely solution will be a boosting of banks' insurance premiums.
"The banking industry will squeak through without a bailout, without a savings-and-loan-type fiasco," predicted Paul Mackey, analyst with Dean Witter Reynolds Inc. "But the investor in banking stocks should be cautious, since many will be market performers until all is sorted out."
The banking stock group has risen a dramatic 64 percent in value since its low point last October, compared to an average gain of 43 percent coming out of the prior three recessions. Such euphoria may not be sustainable.
"You really have to pick stocks based upon the quality of the specific bank, not the group," advised Chris Kotowski, analyst with Oppenheimer & Co. "Just because a certain bank will survive doesn't mean its stock will be any great investment."
Analysts, for obvious reasons, now favor the most conservative of institutions.
"Seventy percent of bad loans are real estate-related, and most of the banks to be closed down will be on the East Coast," commented Mark Lynch, banking analyst with Bear Stearns & Co. "Still, don't expect a bailout."
Based on their high credit quality, Mackey recommends the stock of SunTrust Banks and Wachovia Corp. SunTrust has an excellent franchise in Georgia and Florida, Wachovia an unmatched 30-year record in Georgia and North Carolina. Rated "buy/hold" are J.P. Morgan & Co., Banc One Corp. and BankAmerica Corp.
Top picks of Lynch are Firstar Corp., Wisconsin's biggest bank featuring large trust and credit card businesses and a reasonable stock price, and MBNA, a pure credit-card company which has become the fifth-largest Visa and MasterCard issuer by issuing affinity cards to specialized groups.
Favorites of Kotowski are Bank of New York, with minimal real estate exposure and low stock price due to its leveraged buyout exposure; NBD Bancorp, sporting some of the best credit and loan loss numbers; and Comerica Inc., with strong credit history and a lack of commercial real estate woes. Both Lynch and Kotowski recommend Republic New York, which is conservatively run like an old-style Swiss private bank and keeps only 30 percent of assets in loans.