An American Banker Roundup

Fourth-quarter earnings season begins today, and the market is bracing for another bout with problem loans.

The reporting period is expected to begin calmly, with SunTrust Banks Inc. scheduled to disclose its results today. The Atlanta company had a 32% increase in nonperforming loans from the second quarter to the third quarter but was expected to ride through the fourth pretty much unscathed. SunTrust had no exposure to many of the large national credits that went bust in the last three months of 2000, including loans to Sunbeam Corp., Armstrong Holdings, and Regal Cinemas.

Analysts said they expected broad deterioration in credit quality for the quarter, though some banks obviously will get hit worse than others.

Bank of America Corp., for example, said in December that its exposure to a single loan - many believe it is a $500 million exposure to Sunbeam - would cause it to fall short of expectations. Meanwhile, J.P. Morgan Chase & Co., while suffering from a sharp slowdown in capital markets activities and rising expenses that will force it to miss estimates, appears to have little in the way of problem credits for the period.

Lori Appelbaum, an analyst at Goldman Sachs Group, said regional banks that shied away from participating in the syndicated loan market should fare better than the super-regionals and money-center banks that dominate that business. Regional banks are estimated to have a 10% to 20% increase in nonperforming assets over the third quarter, while companies that participated in the syndicated market could have growth of 30% or more, she said.

Concerns over credit quality did not abate even after the Federal Reserve Board lowered interest rates by 50 basis points last week and indicated a willingness to ease rates again this year. The rate hike came too late to stave off the effects of a slowing economy, according to analysts who predicted first-quarter profits would also be dampened by credit woes.

"You'd have to be some optimist to think that the fourth quarter is going to be the worst of it," said Lawrence Cohn, an analyst at Ryan Beck & Co.

Still, Andrew Collins, an analyst at ING Barings, noted that the problems are not nearly as severe as they were during loan crisis of the early 1990s.

Nonperforming assets bottomed out at 0.58% of total loans at yearend 1999. At the end of the third quarter last year, they were 0.69% of loans. However, the 20-year average is 1.89%, Mr. Collins said.

"They could almost triple from here" and be in line with the average, he said. "There's still a lot of room."

Lower revenues from capital markets activities are expected to drag down profits at Morgan-Chase, Bank of America, and First Union Corp.

Analysts said a weak environment for the underwriting of stocks and bonds could hurt profits at smaller banking companies, particularly those with investment banking groups that rely on the technology sector - such as FleetBoston Financial Group's Robertson Stephens unit.

A diverse business mix could help offset the slowdown in capital markets. Fleet, for instance, is expected to post strong gains from its banking operations in Latin America, analysts said. Citigroup Inc. may have weaker results in its Salomon Smith Barney investment banking unit, but its consumer businesses are expected to have a good showing.

Profits from companies in the Midwest and the Southeast are expected to be mixed. Fred Cummings, an analyst with McDonald Investments of Cleveland, said he expects earnings per share to grow 16% at Fifth Third Bancorp in Cincinnati and 12% at Wells Fargo & Co., which has substantial operations in the nation's heartland.

Bank One Corp.'s earnings, however, are expected to decline 35%, Mr. Cummings said. The Chicago company has had sluggish revenues and rising costs since 1999; Mr. Cummings attributed the anticipated continued weak results to the company's transition under new chief executive James Dimon, who is trying to clear the decks and put the company on firmer financial footing.

"This is going to be another challenging quarter" for Bank One, Mr. Cummings said.

Companies' fourth-quarter reports figure to have plenty of one-time charges, since the period is traditionally used to clean house and start the new year fresh. Mergers completed during the quarter will also lead to charges. J.P. Morgan Chase is expected to take merger-related charges, as is Citigroup Inc., which bought Associates First Capital Corp. in December.

It will be a "cleanup quarter," said Diana Yates, an analyst at A.G. Edwards & Co. in St. Louis. "Some of these companies will reposition for 2001. They will put the issues behind them."

Patrick Reilly, Alissa Leibowitz, and Liz Moyer contributed to this report.

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