An uptick in loan problems, revealed in first-quarter earnings reports, is fueling fear that the industry is in the early stages of a credit quality downturn.
Nonperforming loans rose at both large and small banking companies, cutting into earnings in some cases and prompting investors to sell off banks' shares despite earnings growth that was generally better than expected.
At Bank One Corp., nonperforming assets rose 35% during the quarter, to $1.148 billion. At BankAmerica Corp., nonperforming assets increased by 13% from the previous quarter, mostly among commercial loans, to $3.2 billion. And two large credit problems at Hibernia Corp. prompted the New Orleans company to report a 28% decline in first-quarter profitability.
Among smaller companies, Silicon Valley Bancshares put three loans worth $30 million on nonperforming status, boosting total nonperformers by 130%, to $53 million.
Lending remains the bread and butter of the banking industry, and, in the past, credit quality deterioration has been the cause of the industry's most serious crises.
Though banks are considered adequately capitalized to meet the current challenges, industry observers point out that credit quality has been fraying for the past several quarters.
"It's something we've been seeing more of," said William Katz, banking analyst at Merrill Lynch Global Securities. "We're in the very late stages of the economic cycle, so the risks are to the upside for loan losses," he said.
Some observers noted a disturbing industry countertrend. "We're seeing the level of loan-loss reserves decline at a time when nonperforming loans are creeping up," said Scott Edgar, director of research at the Sife Trust Fund.
But others are less concerned.
"We've seen the best of credit quality and are now on the downhill side," said Gerard Cassidy, banking analyst at Tucker Anthony. "But the downhill side is equivalent in skiers parlance to a bunny slope, not a diamond slope."
The banking companies offer little detail about the loans, citing confidentiality agreements with clients. But the credits appear to cut across all industries.
Bank One said the loans were mainly within the financial services and energy industries. At Hibernia, one loan was to a subprime lender that declared bankruptcy and the other was to an energy company, a typical credit for that region.
Problem loans are a fact of doing businesses, bankers say.
"Ideally you want to see the number at zero, but that's never going to happen," a spokesman for Bank One said.
He said the banking company was "comfortable" with its level on nonperforming loans, which are still less than 1% of total loans.
But regulators have warned that bankers may be dropping their guard.
"We continue to be concerned that banks have become complacent as the economic cycle has continued upward," a spokesman for the Office of the Comptroller of the Currency said. "We have seen a loosening of underwriting standards. Our examiners are bringing bad loans to the attention of bank directors."
Not every banking company is seeing problems. Nonperforming loans declined at SunTrust Banks Inc. in the latest quarter, continuing the downward trend of the past several quarters.
But now is the time to be especially vigilant, said John W. Spiegel, executive vice president at SunTrust. "We're at the low point in the trough," Mr. Spiegel said. "This is a time to make sure that what you put on your books today doesn't come back to haunt you tomorrow."
Industry observers say it is not too soon for the banking companies to take note of a shift in asset quality. "We don't want to look back in a couple of quarters and say that Hibernia was the tip of the iceberg," Mr. Edgar said.
