Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!news.media.mit.edu!americast.com!usa-post Newsgroups: usa-today.bonus From: usa-post@AmeriCast.Com Organization: American Cybercasting Approved: usa-post@AmeriCast.com Subject: bonus Wed, Feb 19 1992 Date: Wed, 19 Feb 92 06:39:08 EST Message-ID: BONUS: Investors banking on recovery USA TODAY Update Feb. 19, 1992 Source: USA TODAY:Gannett National Information Network The worst may be over for the USA's battered banks. Knocked down by bad real-estate loans the past two years, the banking industry is struggling to its feet - helped by falling interest rates and savage cost cutting. Wall Street certainly believes banking has turned the corner: Bank stocks have been climbing even faster than the rest of the rocketing stock market. DO BANK EXPERTS THINK OPTIMISTIC INVESTORS ARE RIGHT? "We started saying about six months ago that we were becoming cautiously less pessimistic," says Walter Shipley, president of Chemical Banking Corp. in New York. "Today, I'm cautiously optimistic that the worst is behind us." Even skeptics such as Prudential Securities' George Salem say things are looking up. Salem, long one of the gloomiest bank analysts on Wall Street, helped write a report earlier this month, declaring, "The skies appear to be clearing! We have not been this optimistic since 1989." WERE THERE ANY NASTY SURPRISES IN LAST QUARTER'S EARNINGS REPORTS? Banks often gut fourth-quarter earnings to set aside huge sums of money to cover delinquent loans. That didn't happen much this time. Overall, banks earned 83 cents for every $100 in assets last year, vs. 74 cents in 1990. East Coast banks, which bore the brunt of the real-estate collapse, improved more: They earned 75 cents for every $100 in assets, vs. a sorry 19 cents in 1990, according to a Keefe, Bruyette & Woods study of 129 bank companies. Keefe, Bruyette - an investment firm that specializes in banks - is forecasting strong earnings gains for most banks this year. HOW HAVE BANKING PROBLEMS RICOCHETED AROUND THE COUNTRY? In the mid-1980s, Midwest banks suffered through a farm crisis. In the late '80s, the collapse of oil prices crushed banks in the Southwest. Then, a nationwide recession and the disintegration of commercial real estate pounded banks in New England and the Mid-Atlantic states. The Midwest and the Southwest have been slowly recovering. Now, East Coast banks may be ready to join them. ARE THE SKIES CLEAR FOR BANKS NOW? Even if the crisis is easing, banks face big problems. They're still vulnerable to the stubborn recession and shifts in interest rates. Demand for loans is so weak, no one expects boom times for banks soon. And they still face long-term challenges to their basic businesses from rivals such as AT&T, Sears and brokerages. WHAT ARE BANKERS AND INVESTORS BETTING ON? That the worst of the recent crisis is past. Ailing Hartford, Conn.-based Shawmut National, for instance, last month called off plans to merge with Bank of Boston - a merger once considered vital to its survival. Now, Shawmut says it's strong enough to survive on its own. Chemical Banking defied skeptics last month by pulling off the biggest stock offering in U.S. banking history. When Chemical said it wanted to raise $1.25 billion by selling stock, critics doubted investors would sink so much money into a company hobbled by problem loans. Wrong. Chemical raised $1.5 billion. HAS BUYING BEEN CONTAGIOUS? Investors also have been snapping up other bank stocks. As of Friday, Keefe's index of 24 big-bank stocks was up 19% since Dec. 20, when the Federal Reserve cut a key interest rate. That compares with an 8% gain for the Standard & Poor's 500-stock index. WHY THE OPTIMISM? Problem loans aren't piling up as fast as they were. And they may be declining. Non-performing assets (delinquent and restructured loans, plus foreclosed real estate) amounted to 3% of bank assets Dec. 31 - up from 2.6% a year earlier but down from a peak of 3.1% Sept. 30, says Keefe, Bruyette. WHAT ELSE HAS HELPED BANKS? Lower interest rates. As interest rates have fallen, banks have cut rates they pay depositors faster than the rates they charge borrowers. That fattens profit margins. Since May 1990, yields on one-year certificates of deposit have fallen from 8.2% to 4.1% but rates on new-car loans have slipped only to 10.3% from 12.3%. Credit-card rates are actually up - to an average 18.8% from 18.5%, according to Bank Rate Monitor. HOW HAVE BANKS BEEN ABLE TO SLASH COSTS? A wave of big mergers has let bank companies take an ax to expenses by closing overlapping branches and laying off workers. The Dec. 31 merger of Chemical and Manufacturers Hanover, for instance, will save the combined company $750 million a year by 1995, at a cost of 6,200 jobs. BankAmerica says its pending takeover of Security Pacific eventually will cut expenses $1.2 billion a year. WHAT ABOUT BANKS THAT AREN'T MERGING? Even bank companies that aren't merging are cutting fat. An American Banker survey found the USA's 25 biggest bank companies eliminated more than 44,000 jobs last year - 6% of their workforce. But to prosper, banks must start lending again. "Lending is the principal business of a bank-holding company, gathering deposits and lending them out," says Samuel McCullough, chairman of Meridian Bancorp in Reading, Pa. Trouble is, most creditworthy borrowers don't want loans, bankers say. They're trying to pay off bills they ran up in the 1980s. SO WHERE IS DEMAND FOR CREDIT GOING TO REAPPEAR? "It's not," says David Cates, chairman of bank-consultant firm Ferguson & Co. Others aren't so gloomy. When the economy recovers, they say, businesses and consumers will be borrowing, though not with the vigor of the 1980s. WHAT OTHER WORRIES DO BANKS FACE? The recession was late coming to California. But now, it's hitting banks there hard. Last quarter, big California banks such as First Interstate Bancorp and Wells Fargo took big losses as loan problems piled up. "The real question now is: How bad is California going to get?" says banking consultant Bert Ely. Most analysts don't think California is another Texas or New England. The biggest real-estate problems are in Los Angeles, where insurance firms and Japanese banks made many of the risky loans. Ely expects some bank fender-benders but no big fatalities. WHAT ELSE CAN HURT BANKS? An uptick in interest rates. If rates head back up, banks' profit margins will shrink as banks pay depositors more. Banks usually change deposit rates faster than they change loan rates. Still, worries about the industry increasingly are offset by relief that the crisis is easing. "I do not foresee at this time any large bank failures," says Comptroller of the Currency Robert Clarke. Concludes Edward Dunn, president of Mercantile Bankshares in Baltimore: "There are grounds for optimism, which hadn't been the case through most of 1991. But it ought to be damned cautious optimism." Bonus Editor: Michele Coleman. (1-919-855-3491) Making copies of USA TODAY Update (Copyright, 1992) for further distribution violates federal law. 08:0002190000T2030 US01- R - USA-TODAY............................. A T2030 02-19 0000 cc cc Feb. 19, 1992 This article is copyright 1992 Gannett News Service. Redistribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. 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