Calif. banks seen handling slump; reserves rising fast enough, Fed economists say.

Reserves Rising Fast Enough, Fed Economists Say

SAN FRANCISCO -- Amid a weak economy and an earnings slump, California banks are recognizing their problems and building sufficient reserves to absorb losses, said an economist at the Federal Reserve Bank of San Francisco.

"While the industry nationwide exhibits steady improvement, the condition of California banks, particularly in the area of problem-loan ratios, continues to worsen," said Jonathan Neuberger.

"However, the data do provide some reasons for optimism," added Mr. Neuberger, coauthor of a bank-profit survey in the San Francisco Fed's Weekly Letter of July 24.

Earnings Drop by 64%

First-quarter earnings of banks in the state totaled $270 million, he noted, down 64% from a year earlier. Much of the decline was attributed to loan-loss provisions of $1.2 billion - more than double those taken in the first quarter of 1991 - and to the performance of the state's largest banks.

In analyzing the data, Mr. Neuberger and research associate Karen Trenholme found some midsize banks had fared best.

Combined earnings at the state's 10 largest banks fell 80% from a year earlier, and their return on assets was 0.19%. By contrast, the next 10 largest banks reported a combined earnings increase of almost 80% and an ROA of 1.45%.

The state's remaining 450 banks posted a 4% decline in aggregate earnings from the 1991 first quarter and a 0.58% ROA.

Improvement Elsewhere

Banks in the eight other states of the 12th Federal Reserve District has a strong first quarter, Mr. Neuberger and Ms. Trenholme wrote.

"Earnings were $467 million, up 10% from the previous year's first quarter," they wrote. And the district's other states all reported average bank ROA's of more than 1%. "Problem-loan ratios at banks in the 12th District, excluding California, were stable or declining in the quarter and were below national averages."

At California banks, the ratio of problem loans to total loans rose 1.7 percentage points, to 7.5%, from the first quarter of 1991 to this year's first quarter. The problem-loan ratio for construction credits was more than 27% at California banks with more than $1 billion in assets. The U.S. average is about 19%.

Yet California banks reported an aggregate profit for the first quarter after two consecutive quarters of aggregate losses, despite the weak economy and sizable loss provisions.

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