Despite the pileup of bad news about subprime automobile lending, banks that have jumped into the business in recent years don't plan to hit the brakes anytime soon, bankers and observers say.

The reasons bankers entered the sector in the first place-high profit margins, low start-up costs, and dramatic growth potential-are still compelling, said Gareth Plank, an analyst at UBS Securities, New York.

"It's a real business that's not going to go away. Obviously, if it's well managed, it can provide superior returns," Mr. Plank said.

Still, bankers say they aren't dismissing developments at Mercury Finance Co. and Jayhawk Acceptance Corp. that have rocked the field in the past two weeks. Mercury on Jan. 30 restated its earnings for the past four years after accounting irregularities were uncovered. And Jayhawk, after reporting a fourth quarter loss that prompted lenders to revoke credit lines, filed for bankruptcy Feb. 7.

"There is a tremendous amount of panic out there that is beginning to ripple through the entire investment community," said Jay Meyerson, head of Key Bank USA, the consumer finance unit of KeyCorp, one of the most aggressive banking companies in the subprime arena.

Banks are approaching the business in three ways: acquiring subprime lenders, establishing links with a subprime lender, or stretching their credit criteria to attract subprime borrowers.

In the wake of the setbacks, bankers said they have are stepping up their scrutiny of subprime borrowers.

"We're going to do a little more fine tuning, in terms of credit quality requirements," said Anne Tonks, director of national dealer lending for Bank of America.

The San Francisco bank's dealer lending program finances loans through links with thousands of car lots nationwide, and sells the loans to Greenwich Capital Holdings, Greenwich, Conn.

Meanwhile, even banks that remain strongly interested in subprime auto lending are trying to glean lessons from the debacle. For starters, they are rethinking how to evaluate potential purchases.

"Clearly, you have to be extra careful" if you're planning to buy a subprime company, said J.P. Burzotta, manager of indirect lending for PNC Bank. "I wouldn't want to paint the industry with a broad brush, but there is another potential Mercury out there."

PNC Corp., KeyCorp, and Bank of Boston Corp. are among the large banks that say they are still interested in buying a subprime auto lender. Executives said the events of the last two weeks, far from scaring them away from the sector, have made deals more attractive.

"In the midst of adversity, there is opportunity," said Mr. Burzotta. "We're in the process of talking to (an auto finance company) right now, and we're at a better position in terms of a price."

PNC currently refers its subprime auto borrowers to Atlanta-based Automotive Lenders Corp., collecting a fee for loans signed.

KeyCorp has made the most significant commitment to the subprime auto market, with its $325 million purchase of Auto Finance Group in late 1995. The bank has no intention of pulling back on the subprime auto front, said Jay Meyerson, chairman of KeyBank USA, the Cleveland-based banking company's consumer finance unit.

Mr. Meyerson said the crackups at Mercury and Jayhawk put KeyCorp in position to "dominate the market."

If banks and Wall Street shut down the cash pipeline to independent auto financiers, capital rich KeyCorp will be able to snap up players at low prices, he said. The bank is actively shopping for another subprime auto finance company, he added.

And BankBoston-which came the closest of any bank to being burned by the Mercury mess-remains convinced that subprime auto lending is an attractive business, said Karen Schwartzman, the company's chief spokeswoman.

The company, which had planned to sell its Fidelity Acceptance Corp. unit to Mercury in exchange for a 16% ownership stake in Mercury, scrapped that deal when the problems erupted. But BankBoston is still interested in taking a stake in another auto finance company, and no longer faces any obstacles to doing so: Mercury recently waived its right to take 30 days to cure its alleged breach of contract, Ms. Schwartzman said.

Some bankers in the subprime business said they're not vulnerable, because they've been doing things the right way all along.

"If you're doing whatever you're doing properly, every time the wind changes you don't need to jump up and say, 'Jeepers, we'd better check that out,'" said John Thornton, chief financial officer at Norwest Corp.

Last year, the Minneapolis banking company made $300 million in auto loans to subprime borrowers through its subsidiary Community Credit subsidiary, purchased in 1984. The subsidiary, part of Norwest's consumer finance arm, is a 52-year-old family business that is still run by the founder's son, Mr. Thornton said.

Norwest relies on experienced subprime professionals to keep the loan pool performing well, he added. Community Credit district managers, all of whom have over 15 years of experience in subprime lending, review every loan that is made.

Still, some banks said the troubles have confirmed their long-running aversion to subprime auto lending.

"Long before the Jayhawk and Mercury news broke, we knew that we did not want to be a player in the subprime auto business," said a spokeswoman for Barnett Banks Inc.

The Jacksonville, Fla.-based banking company is keen on auto lending, though. On Jan. 14, it announced a $570 million deal to buy Oxford Finance, a Melville, N.Y. based auto-lender that caters to customers with excellent credit. The purchase remains on track, and Barnett hasn't seen any need to reexamine the company's books, the spokeswoman said.

Certainly, the past two weeks' developments offer reluctant participants in the subprime boom a chance to bow out gracefully.

"The companies that were sitting on the fence are climbing down, and saying 'I told you so,' " said Mr. Plank of UBS Securities.

Indeed, a risk-management executive at a major New York bank said he doesn't expect to see new lenders entering the subprime auto business.

"Banks that didn't get into (subprime lending) 3 years ago have already missed the boat," said the executive, who did not want his name used. His bank has been considering a purchase for several years, but hasn't made the leap, and he said the turmoil has convinced him to steer clear of subprime auto lending.

High loan rates and inflated car values are, at the very least, a public relations problem, he said, and at worst could spell class-action litigation.

Certainly, the banking industry's drive into subprime auto lending hasn't always won plaudits from analysts and investors. KeyCorp, for instance, was roundly criticized for the $325 million price tag on Auto Finance group.

One of the critics, analyst Steven Eisman of Oppenheimer & Co., said the problem is that "there are just too many companies chasing after the same business" and consequently driving down credit quality.

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