End may be in sight for banking's woes Expenses are lower and bad loans seem to have peaked

October 20, 1991|By Thomas Easton | Thomas Easton,New York Bureau of The Sun

New York -- When Citicorp, the nation's largest banking company, lays off "a ton" of employees, eliminates a dividend instituted the year before Napoleon abdicated, and suggests the company Christmas party is no longer on the house, it seems the whole industry is sliding closer to an abyss.

Despite the bad news delivered last week by Citicorp CEO John Reed, Santa might visit the industry -- even if he is frazzled,

leaner and a bit choosier about chimneys. Contrary to some reports -- and high-profile disasters -- U.S. banks may be on the verge of a recovery.

Since last November, bank stock prices have, on average, doubled. Write-offs for bad loans may have reached a plateau. And the amount of non-performing loans -- those one step from a write-off -- has dropped for the first time in years.

Meanwhile, ruthless cost-cutting has lowered bank expenses. And banks are benefiting from an unusually wide spread between the rates at which they borrow money and the rates at which they lend it.

Altogether, that suggests banks' severely depressed earnings may rebound. The consensus forecast of security analysts calls for a 20 percent improvement in bank profits this year and a 39 percent increase next year, according to I/B/E/S, a statistical service of the New York brokerage Lynch, Jones & Ryan. Those gains should be spread broadly throughout the country, with the exception of the West Coast.

"It will take another quarter or two to be really convincing, but it seems the worst has passed," said Paul Lesutis, a portfolio manager at Brandywine Asset Management in Wilmington, Del. "At some point, they will have reserved adequately for all their bad loans, and I suspect that will soon be the case. Then, they will have enormous earnings potential."

"For the most part, normalcy has returned," added David Penn, a bank analyst at Legg Mason.

To be sure, third-quarter announcements for some banks are dreadful. Along with the $885 million loss announced by New York-based Citicorp, California-based Security Pacific lost $508.5 million, Chicago-based Continental Bank lost $185 million and Baltimore-based MNC Financial lost $59 million.

Even in the bad news, though, there is hope. MNC's loss was a fraction of the $242 million lost during the same period in 1990.

And at the other extreme, major banks across the country reported growing profits. First Maryland Bancorp earned $21 million in the period, up 27 percent from last year. Signet Banking Corp.'s earnings doubled. Other banks posting better third-quarter numbers included New York-based Morgan Guaranty, Chemical and Manufacturers Hanover, North Carolina's Wachovia, Pittsburgh-based PNC and San Francisco-based BankAmerica.

And although Florida-based Barnett Banks and Bank of New York reported declining earnings, both pleased investors by showing drops in bad loans.

Even thrifts appear to be improving. In the first half of 1991, thrifts collectively registered two consecutive quarterly profits, breaking a streak of almost four years of consecutive losses, noted Thomas O'Donnell, an analyst with Prudential Securities.

Problems remain. Although the amount of bad loans isn't expanding, it remains at historically high levels. More spectacular failures are almost inevitable.

"I don't think it will be a boring industry for years to come," said John Heffern of Alex. Brown & Sons. "I wish it were."

Whether MNC and other banks with well-documented problems will again thrive remains questionable. And nationwide, business slow. Loan volume has declined in the past year. Since lending still constitutes 60 percent to 70 percent of industry revenues, that means sales of the core product are lackluster.

Profits, meanwhile, are meager because of continuing write-downs. And any further recovery in profits could be undermined by a lousy economy.

"Any time we go into a recession, banks suffer and loan losses increase," said Walter Jewett, a bank consultant at Booz Allen Hamilton. "That's nothing new."

Some of those losses may be particularly vexing because they are tied to real estate, an asset that is difficult to liquidate.

A major New York bank was pleased recently to have foreclosed on a downtown office building and sold it on the same day -- even though it received only 50 cents on the dollar. Frequently, banks that have foreclosed spend months finding a buyer and negotiating a sale, becoming reluctant property managers in the meantime.

4 Still, many factors indicate a banking recovery.

Begin with the most critical cost of all: the difference between what banks pay for money and how much they receive for lending it. Remember all the headlines about the Federal Reserve Board cutting rates? In the short term, at least, those cuts meant more to banks than to their customers.

Rates on passbook savings, interest-bearing checking accounts, and overnight loans between banks have fallen precipitously. But rates on consumer loans, whether for a mortgage or a credit card purchase, have been slow to follow.

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