Solution to Capital Surplus Seen Near: Nonperformers

The days of excess capital in the banking industry may be numbered, bank bond analyst Katharine Rossow of Chase Securities Inc. says in a recent report.

Ms. Rossow said banks have been overcapitalized only because their nonperforming assets have been "abnormally" low.

She predicted that second-quarter earnings could mark a turning point.

Since last year, there has been a resurgence of loan growth, and with it an increase in risk taking, she said. Because loan growth has increased, she said, nonperforming assets will go up, and that could quickly deplete surplus capital.

Since 1990, the median nonperforming assets ratio for the top 50 U.S. banks dropped to 1.48% at the end of 1995 from 5.18% in 1990. In the same time, the loan loss reserves have dipped from 2.95% of assets to 2.21%/

Ms. Rossow predicted that nonperforming assets will increase to a normal level of about 2.2%.

She said reserves have been running at 170% of nonperforming assets, and that has caused some equity analysts to believe that banks are over- reserved. The rise in nonperformers "will make the reserve coverage ratio drop back toward 100%," Ms. Rossow wrote.

That, she said, will leave bankers less flexibility to execute share buybacks and dividend programs that are popular with shareholders.

U.S. banks still remain the "best capitalized" in the world, she said, but they are not as well capitalized as they were two years ago.

Banks including KeyCorp, Southern National Corp., and Norwest Corp. already have seen an uptick in nonperforming assets, she said.

Warren Heller, director of research at Veribanc, agreed that the argument that banks are overcapitalized is less convincing than it was.

Although "overcapitalized" banks - as designated by regulators - still dominate the industry, the number of banks that are merely "adequately" capitalized has increased to 158 from 130 since the second quarter of last year, Mr. Heller said.

Large institutions - including First Union Corp.'s lead unit in Charlotte, N.C., Norwest's Colorado bank, and NationsBank Corp.'s Texas unit - have "dipped" into the adequately capitalized category, which "is sure to raise some eyebrows," he said.

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