Analysts Anxiously Await Federal Review of Credits
Once again, bank analysts are anxiously awaiting the outcome of the annual review of so-called shared national credits by federal bank examiners.
Whether the review affects banks' second-quarter results will depend on how tough regulators prove to be in forcing banks to take extra provisions and writedowns.
Regulators are expected to complete the review within the next week or so.
All loans of $20 million or more that are held by at least two participants are subject to the regulatory review, which is conducted every spring.
But this year an uncertain economy is making the outcome harder to devine than usual, said James McDermott, president of Keefe Bruyette & Woods.
"It has cast a cloud over the whole process," he added.
Other analysts are also similarly uncertain about the outcome.
"I haven't picked up any red flags, but I've picked up some yellow caution lights," said Raphael Soifer, an analyst at Brown Brothers Harriman.
As a result, Mr. Soifer added, he is feeling "less confident" about his second-quarter earnings estimates.
Though he hasn't changed any estimates, Mr. Soifer said he has been adding some "qualifying verbiage" to them.
The conventional wisdom among analysts is that problem loans will continue to rise in the second quarter, but at a slower pace than before.
That view could change if regulators take an unexpectedly tough line in the exams.
But after being criticized for taking too soft an approach toward banks in the mid-1980s, and too tough a line in the past few years, Mr. McDermott thinks the regulators are now trying to find a middle ground.
In reviewing commercial real estate loans, for example, Mr. McDermott said he thinks regulators have shifted away from a liquidation approach.
Instead, examiners appear to be taking a longer-term view of property values, which will translate into less provisioning by banks, he said.
At the same time, Allerton Smith of First Boston Corp. said he thinks bank regulators are now cracking down on some regional banks that failed to perform their own due diligence on credits in which they participated.
Oppenheimer & Co. analyst Christophe Kotowski said he doesn't pay a lot of attention to the regulatory reviews, because good banks recognize their problems before the regulators come in.
"If you need a regulator to tell you you have problems, then you're doing something seriously wrong," he said.