Baldwin warns against lax credit

Mercantile chairman says quest for profits tempting loan officers

Parallels drawn to 1980s

April 29, 1999|By Jay Hancock | Jay Hancock,SUN STAFF

Warning that banks are lowering their credit yardsticks and that "the lessons of the early 1990s are pushed aside," Mercantile Bankshares Corp. chief H. Furlong Baldwin said yesterday that a U.S. economic slowdown could bring a new round of credit trauma.

Although U.S. banks have become perhaps as strong as they have been since the 1950s, Baldwin said, pressure from Wall Street for perpetually higher profits is tempting some loan officers onto thinner ice.

"To meet [earnings expectations], one could submit, banks are stretching on their credit standards," he said.

Baldwin, who is chairman and chief executive officer of Baltimore-based Mercantile, spoke to more than 50 shareholders and employees at the bank's annual meeting downtown. At the meeting, shareholders elected a slate of 15 directors and approved a stock plan for employees.

While describing another year of earnings increases and top-grade financial scores for Mercantile, he also traced parallels between recent economic events and those of a decade ago.

Last summer, when collapses in Russia and South America threatened U.S. lenders and U.S. monetary authorities felt forced to lower interest rates, it "looked a lot as if earlier years of the past decade were starting again," Baldwin said.

Bank damage in the 1980s stemmed from foreign loan defaults and bad real estate lending.

While the U.S. credit system only trembled last year but didn't implode, Baldwin said, the events were a major alarm, and the problems still exist, including risky securities trading by banks.

"In 1993, 35 percent of all syndicated lending was to credits below investment grade," he said. "In the fall of 1998, 62 percent of syndicated loans were to credits below investment grade -- about a doubling of exposure in five years" -- with returns not substantially better than those to high-grade borrowers.

The lesson: "A principal concern should be the next slowdown in our domestic economy," Baldwin said. "In the next domestic economic slowdown, the lowering of credit standards, the shrinkage from appropriate yields and the trading accounts will selectively come home to roost."

That they won't roost at Mercantile was implied but not said.

The banking company, which had $7.6 billion in assets at the end of 1998, booked another lucrative year, beating most of its peers in several key ratios. Of the 50 biggest banking companies in the country, Mercantile was No. 1 in return on assets, No. 1 in equity to assets and No. 3 in efficiency ratio, which measures cost against revenue, Baldwin said.

Also yesterday, the company disclosed higher profit for the three months that ended March 31, causing its stock to rise $1.81 per share in trading to close at $38.19.

Mercantile's net income per share increased 8.2 percent to 53 cents from the first quarter of 1998, it said. Total net income rose 4.7 percent from the first quarter of last year to $37.2 million.

Net interest income -- revenue from loans and investments minus the cost of funds -- rose 3.9 percent to $88.7 million during the quarter, compared with the same period last year. Total loans rose 5.9 percent to $5.23 billion.

Noninterest income rose 9.5 percent during the quarter, thanks partly to increased trust revenue and an increase in deposit service charges.

Pub Date: 4/29/99

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