Record Card Chargeoffs Mar New Earnings Peak

Commercial banks set another earnings record in the second quarter, though it was marred by their highest-ever credit card chargeoff rate.

The writeoffs, at 5.22% of card loans, were 30 basis points higher than in the previous quarter and 74 basis points above the year-earlier level, the Federal Deposit Insurance Corp. said in its profitability report for 9,308 insured commercial banks.

The aggregate net income of $14.6 billion in the second quarter was 1% higher than in the first quarter-the previous record-and up 6% from the 1996 quarter, the FDIC said Thursday.

Loan growth drove the earnings improvement, the FDIC said. But the profitability of the 74 banks at which credit card loans account for more than half of total loans has "eroded significantly," said acting chairman Andrew C. Hove Jr.

At these card-oriented institutions, profits were $631.8 million, which was $334 million, or 35%, lower than in the first quarter. The decline was mainly due to loan-loss provisions and significant one-time expenses, the FDIC said.

Bank economists see the card-loss rates turning a corner soon. Some have seen encouraging signs in recent bank earnings statements and analyses of delinquency trends.

"If we are not there, we are close," said Joel L. Naroff, senior vice president and chief economist of First Union Corp. "For at least 16 months, the banking industry has been working extremely hard at ratcheting down outstanding credit and restricting the extension of credit."

"This problem is close to the peak because banks have been policing themselves better in this area for some time," said Frederick Breimyer, chief economist of State Street Bank and Trust Co., Boston.

"The fact that chargeoffs are high indicates that the industry is recognizing these losses and putting them behind it as quickly as it can," said James Chessen, chief economist of the American Bankers Association.

Chargeoffs in other loan categories declined during the second quarter, the FDIC said.

Noncurrent loans-those more than 90 days past due-declined by $480 million during the quarter, to $28.6 billion. At midyear, only 1% of commercial banks' loans were noncurrent, the lowest ratio in the 16 years that the FDIC has been compiling this data.

With yields high on growing loan portfolios, net interest income increased 7.4% from the 1996 second quarter, to $43.4 billion.

"The industry achieved record profits despite the decline in profits at the specialized credit card banks," Mr. Hove said. "This concern does not cast a shadow on the condition of the commercial banking industry as a whole."

In addition, he said there is at least anecdotal evidence that bankers are curtailing card solicitations and tightening underwriting standards.

However, the record 367,000 personal bankruptcy filings in the second quarter concerns regulators, Mr. Hove said. This figure, which has been increasing steadily since 1995, has tracked loss rates on credit cards.

"We continue to monitor closely the parallel rise in both measures-just as, through examinations, we continue to monitor the condition of the specialized credit card banks," Mr. Hove said.

Meanwhile, the industry's assets grew in the second quarter by $129.4 billion, to $4.8 trillion. Almost three-quarters of the increase involved loans and leases, which were up 3.4%, or $92.7 billion, the FDIC said.

Commercial and industrial loans increased by 3%, to $732 billion during the quarter, while residential real estate loans increased by the same percentage, to $1.2 trillion.

The record earnings translated into a second-quarter return on assets of 1.24%-1 basis point below the first-quarter figure, but still the fifth- highest quarterly figure reported.

Equity capital increased 3.2%, to $402.8 billion, or 8.44% of industry assets-the highest level since 1941.

Second-quarter profits at thrifts insured by the FDIC slid 8.2% to, $2.4 billion. The main factor in the decline, the agency said, was higher income tax payments in the latest quarter.

The agency also reported that from August 1996 through Thursday, no FDIC-insured bank or thrift had failed.

"The last time we went 12 months without a bank failure was the early 1960s," Mr. Hove said.

The number of problem commercial banks dropped by three during the second quarter, to 74. They had combined assets of $5 billion.

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