Note to investors: A veteran banking observer suspects the industry's almost decade-long business boom is running on borrowed time.

"While banks keep setting new profitability records, the regulators' data show a very definite flattening-out pattern," said the researcher, Warren G. Heller.

In particular, he noted that Asian problems are surfacing and signs are emerging that the epic economic growth in the South may finally be slowing. Credit card and consumer debt also remain a worry. (See related article on page 20.)

While industry return on assets is still improving, gains are now in the vicinity of the second decimal place, said Mr. Heller, research director at Veribanc Inc., Wakefield, Mass.

His findings are derived from yearend call report data of all the nation's banks, released March 19 by the Federal Reserve, as well as from other statistics collected by federal regulators.

"They suggest that the health of the industry is poised to erode," he said.

"As the industry ekes out new profitability records, interest rate margins keep thinning, and regulators issue ongoing calls for stronger loan underwriting standards," he pointed out.

In particular, "serious delinquencies and restructured debt among loans to overseas borrowers increased by 12.2% during 1997," he said. "Most of the rise occurred in the fourth quarter as problem overseas loans increased to $1.83 billion, from $1.6 billion in the third quarter, coincident with the sharp increase of economic problems in Asia."

Looking just at the largest institutions, 37 U.S. banks held $62.5 billion of loans to Asian borrowers at Sept. 30. That amounted to 23% of all U.S. bank lending overseas.

In the overseas sector, problem loans at the 37 banks rose to $1.75 billion at Dec. 31, from $1.52 billion Sept. 30. "While the potential threat to most of these institutions' capital is currently not severe, future pressure on earnings could be significant," Mr. Heller said.

At home, problem loans at all U.S. banks-those over 90 days past due- fell during 1997, both in dollar amounts and as a percentage of all loans. "However, this reduction can largely be credited to the industry's more aggressive stance toward chargeoffs," Mr. Heller said.

A different picture of loan quality emerges in a state-by-state analysis. In eight states, both loan chargeoff and loan delinquency rates increased in 1997.

The most dramatic increases were in the South. In Alabama, problem loans last year jumped 35%, and chargeoffs rose 16%. In Mississippi, problems loans were up 29%; chargeoffs, 12%, while in Tennessee they rose 13% and 12.5%, respectively.

"Much of the South never experienced the last recession," Mr. Heller noted. "But there is now evidence of slowdown in the region's economy."

The South, because of its rapid growth, has been among the most lucrative banking markets for two decades. The boom spawned and perpetuated the growth of superregional banking companies like NationsBank and First Union.

While credit quality issues inched nearer the surface, Mr. Heller emphasized that industry reserves for loan chargeoffs "continued to lose ground with respect to loan growth" last year.

In fact, "current reserve levels could support present earnings for approximately one year in the face of a rise in chargeoff rates to 1990-92 levels," he said.

Meanwhile, "after a modest hiatus in the third quarter, serious (90- days-past-due or nonaccrual) delinquencies of bank credit card debt at yearend rose to 2.13% of card debt outstanding," he said. This is a record since this type of data has been collected by regulators, and it is higher than any of the rates associated with the 1990-91 recession.

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