Falling interest rates have produced a little-noticed bonanza for banks bogged down with troubled loans.

So far, most of the attention has focused on how declining rates have boosted interest income. And indeed, the wider spread between what banks are paid in interest and what they pay out is the primary cause of near-record net interest margins.

But the rate drop has had another benefit: reducing the cost of funding bad assets. And for institutions saddled with asset problems, that is cutting interest expenses significantly, bolstering the bottom line.

The primary beneficiaries are institutions like Bank of Boston Corp., Chase Manhattan Corp., Citicorp, Shawmut National Corp., Midlantic Corp., and MNC Financial Corp.

Each has relatively high ratios of nonperforming assets, and each has been on the rebound since rates started falling.

"For any bank with a meaningful level of problem assets, lower interest rates is a major benefit," said Thomas Brown, an analyst at Donaldson, Lufkin, Jenrette Securities Co.

The cost of carrying, or funding, bad assets is roughly half what it was two years ago.

Consider the impact on a $100 million nonperforming loan. If borrowing costs were 8%,the loan would cost $8 million to fund, with no offsetting interest income. But with a 4% carrying rate, the drag on earnings is just $4 million.

$18 Million Saving Estimated

Donaldson Lufkin estimated that the overall cost of funds for Bank of Boston Corp. has plummeted to 4.7% in the second quarter, from 7.85% in 1990. So Bank of Boston's cost of carrying its bad assets is an estimated $18.4 million less this year than in 1991, Mr. Brown said.

The Boston banking company has one of the highest levels of nonperforming assets in the industry, 6.25% of its total assets, about double the industry average. It still pays much higher rates than the average bank for funds, but as some pricey certificates of deposit run off, that rate should fall, increasing the saving on carrying costs.

Help Despite More Bad Loans

At Shawmut National, where the ratio of nonperforming assets to assets is 10%, funding costs have followed a similar pattern, sliding down to 4.43% in the second quarter, from 7.61% in 1990. The savings anticipated this year from lower funding costs: $25.9 million, according to Mr. Brown.

Citicorp has benefited as well, though, unlike those at the two Boston banks, its commercial nonperforming assets have continued to increase for the past year and a half.

The carrying costs for nonperforming commercial loans and foreclosed property have remained stable for the past six quarters, at about $110 million. During the same period, nonperforming assets jumped $1 billion, to about $8 billion.

"We know that the lower interest rate environment has been generally beneficial," said a Citicorp spokesman.

At banks with high levels of bad loans, lower carrying costs can help boost net interest margins by as much as 20%, said Mr. Brown. At Bank of Boston, net interest margin jumped to 3.72% in the second quarter, from 3.14% the year before.

The lower costs of funds have helped keep banks solvent, said some observers. "That's why it is easier for a bank with a high percentage of bad loans to survive now than it was during the recent crisis," said H. Rodgin Cohen, a lawyer at Sullivan & Cromwell in New York.

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