WASHINGTON, Dec. 26 — When bankers and industry analysts talk about 1990, there is remarkable consensus: Banks and thrifts must become leaner, faster, and tougher. Many will not make it through the year.
Already thin interest margins will grow thinner, and upticks in nonperforming real estate loans will affect more banks — mainly regionals, according to some of banking's best thinkers. At the same time, the industry will be preoccupied again with credit quality and consolidation, they say.
Indeed, after a decade of remarkable change and upheaval in banking, industry watchers believe that in 1990 the rift between winners and losers will widen quickly.
"There will be a vicious cycle," said H. Rodgin Cohen, a leading bank attorney with Sullivan & Cromwell. "There is a desperate need to consolidate in the industry to improve performance. But that will be more difficult because of a decline in market prices at many institutions."
On top of that, regulators will grow aggressively risk averse, pressuring institutions both earlier and more often to change high-stakes habits and raise capital. Mergers, both voluntary and involuntary, of banks and thrifts will realign industry power and force some dramatic restructuring.
In simplest terms, observers say, the institutions most likely to prosper are still those that truly know how to make and manage a loan. "Overcapacity of credit is about to hit home," warns Lowell Bryan, banking consultant with McKinsey & Co. "If you haven't been following good lending techniques, if you got carried away, you will be the subject of takeovers and forced recapitalization."
"The pressure to keep increasing bank earnings has perverse effects," said John D. Hawke, a former general counsel at the Federal Reserve Board. "No one is forcing banks to take in money. They can turn off the inflow."
The decade of the 1980s is littered with the remains of once heralded lending institutions: Continental Illinois, Mellon Bank, First Republic, Bank of Boston, and many others fell on hard times by unfortunate lending decisions. In more drastic terms, an entire thrift industry was bailed out by U.S. taxpayers after an uncontrolled lending spree, and as many as half the remaining S&Ls may soon cease to exist.
New powerhouses are emerging, including Banc One Corp., NCNB Corp., Bankers Trust New York Corp., Wells Fargo & Co., and Avantor Financial Corp.
"With the earth shifting beneath the entire financial institutions industry, when the dust settles we'll see who has the best underwriting standards," said Bruce Harting, an analyst at Salomon Brothers Inc.
"Banking is moving to thinner margins, and permanently thinner margins," warns banking consultant Edward Furash, who sees too many bankers without a strategy and in search of an industry role model.
One of the lending industry's most quality-conscious bankers, John G. Medlin Jr. of First Wachovia Corp., says the "dire pessimists in 1990 will be wrong again" but he does expect less industry growth next year. "Margins still will be under pressure from competition, keeping loan rates down and competition for deposits nudging those costs up," said the chairman and chief executive of the North Carolina-based banking company.
The need to control operating costs will drive more banks to in-market mergers, said Mr. Medlin, because of the difficulty of surviving independently, maintaining modern technology, and keeping critical size.
Underlying many concerns for 1990 is the slowing U.S. economy. While interest rates are likely to continue to fall through at least the first half of the year — with a prime rate near 9.5% by summer — loan demand is not expected to revive significantly.
