In stock market speak, lenders last week rotated out of growth and into capital preservation.
Last week's profit warnings by Wachovia Corp. and Unionbancal Corp. did more than reawaken investors to the disturbance banks encountered this quarter. They signaled another shift in psychology that erased the optimism a recent bank stock rally had inspired.
The slowing of the U.S. economy and the weakness in equity markets are fueling a feedback mechanism that has hit revenues on several levels, ranging from loan growth to venture capital. Whereas some banks had been able to use strength in one area to gloss over pockets of weakness, this time there is little cover.
In discussing Unionbancal's decision to increase its second quarter credit loss provision to $70 million, about double normal, executives made observations that could prove unsettling to those waiting for similar shoes to fall at their banks.
For example, only two of the nine credits behind the move at Unionbancal, which is mostly owned by Bank of Tokyo-Mitsubishi Ltd., were attributed to the usual scapegoat, the health-care borrowers. The others came from retailing (two) as well as forest products financial services, manufacturing, energy, and technology (one each).
"With these customers the common theme was a plan that is not coming to fruition," said the company's chief credit officer, Peter Butcher, during a conference call with analysts and investors. "Financial forecasts are not being met in an increasingly competitive environment, despite what you read about high growth rates in the economy. We really tightened down on what we thought represented potential weakness."
In terms of its own operations, Unionbancal does not appear to be suffering from the shifting interest rate environment. Executives said the company's net interest margin was holding up extremely well and costs were coming down faster than its reduction plan had called for.
But with corporate customers facing their own troubles and regulators casting a closer eye on credit quality, Unionbancal opted to take at least some of its punishment now, in one case selling off its exposure to a bad retail credit. Indeed, the bank expects to record a similar provision in the third quarter and yet another, perhaps smaller, in the fourth. By the same token, it no longer expects to go out and generate the kind of loan growth it has enjoyed in recent years.
"We no longer need double-digit growth to report the kind of profitability we have been," said vice chairman Robert Walker. "If we can keep it in the 6 to 7% range we're going to be happy campers."
Mr. Walker said the company was not surprised by the deterioration of the assets involved; it had cited the trouble spots in recent quarterly filings with the Securities and Exchange Commission, he said. Also, nearly half the dollar amount involved related to retail credits gone sour, in one case due to the bankruptcy of a Texas retailer. While not naming the company, he was likely referring to Stage Stores Inc., which recently filed for Chapter 11 protection and whose liabilities surely are not limited to Unionbancal.
These days, Mr. Walker said, sharing risk - avoiding getting caught holding the bag when a loan goes bad - is a central management tenet. "We have a philosophy here that pigs get fat and hogs get slaughtered," he said. "We don't believe that it's ever wise to be the only bank" on a major loan.
A similar philosophy may soon find its way to other executive suites. Wachovia, long considered a standard-bearer in credit quality, had come under some criticism early this year from analysts who noticed its shrinking credit-loss provision and wondered whether the company was using the number to manage earnings.
With credit hot spots popping up in several areas, including some recently favored sectors like telecommunications, investors are likely to fixate on credit exposure at least until there is convincing evidence that borrowers and banks can again grow their way out of their troubles.