U.S. banks have most bad debts since 1992

Joint federal review finds 13% of loans risky

October 09, 2002|By BLOOMBERG NEWS

WASHINGTON - U.S. banks are saddled with more bad debts than at any other time in a decade, as cable and telecommunications companies struggle to repay loans, a federal report released yesterday shows.

Of $1.9 trillion in bank loans and commitments, about 13 percent were classified in June as in default or unlikely to be repaid, according to a study by the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. That's up from 9 percent a year earlier and marks the biggest proportion since 1992, when about 15 percent of commitments were listed as risky.

"We still have a big overhang of debt out there from highly leveraged companies," said David Gibbons, deputy comptroller for credit risk at the comptroller's office. "Some folks in the business think loan deterioration is peaking. I don't know that it is."

The bad loans are rising as prosecutors investigate allegations of fraud at companies such as Enron Corp. and WorldCom Inc., and as the economic recovery slows, regulators said. Risky loans rose to $236.1 billion in the year that ended in June from $192.8 billion a year earlier, according to the survey.

The "shared national credit" review is conducted from May to July each year and examines loans of more than $20 million that are shared by at least three banks. The study this year covered 9,328 loans to 5,542 borrowers.

While the percentage of bad loans climbed, the pace of the increase was slower than it was last year, regulators said. Loans classified as "substandard," "doubtful" or "loss" rose by $39.4 billion, or 34 percent, to $157.1 billion, compared with an 86 percent rise in 2001.

Loans that "exhibit potential weakness" rose by $3.6 billion, or 5 percent, to $79 billion, after more than doubling a year ago.

A subcommittee reviewed telecommunications and cable credits, an industry "going through gut-wrenching change," Gibbons said. About a third of commitments to those industries are at risk, up from about 11 percent last year.

Five of the 10 largest Chapter 11 bankruptcy filings in U.S. history occurred this year, including WorldCom, the largest ever with $107 billion in assets; Global Crossing Ltd., with $25.4 billion in assets; and Adelphia Communications Corp., with $24.4 billion in assets.

About 14 percent of the $226.1 billion in credits to companies in the oil, gas, pipelines and utilities industries is imperiled, up from 5 percent of $224.5 billion a year ago, the study showed.

Regulators and some investors said banks are better equipped to deal with risky loans now than a decade ago. "Strong earnings and capital bases, coupled with diverse revenue sources and balance sheets" are helping banks absorb deteriorating lending conditions, regulators said.

"When you put it in perspective, it's not that bad," said Michael Stead, a Wells Fargo fund manager.

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