Big Banks Riding Bumpy Roads
Bankers worldwide will look back on 1991 as a year of reckoning, a time when the lending excesses of the 1980s came back to haunt lenders from New York to Tokyo to London.
The bright side of the picture is this: Many banks moved aggressively to cope with their problems. Sharp increases in loan-loss reserves became common, and major mergers were launched in the U.S. and Europe. The cost savings from these marriages should kick in over the next few years, making for a stronger banking system.
Still, many bankers remain worried about the brewing storm of deregulation, which will likely unleash a fury of intense competition in the 1990s. Indeed, as state and national and functional barriers fall, many banks around the world could be run out of existence or merged into oblivion.
But longer-term, some bankers see increased opportunity in deregulation - under way in Italy, Spain, and Japan, and inching closer to reality in the United States. And other observers say the current crisis already has forged banks that are leaner, tougher and - perhaps most important - better capitalized.
"In most other countries the earnings of major banks were disappointing, but there was no cause for concern as regards their underlying financial strength," noted the Bank for International Settlements in a recent report.
The BIS isn't alone in its upbeat appraisal: Most industry experts agree there's light at the end of the tunnel. But for many banks, the tunnel is looking longer all the time.
"Commercial banking is going through a tough period," said Serge Bellanger, executive vice president and general manager for CIC-Union Europeene, International et Cie. in New York. "Banks are playing short and cleaning house."
"The level of loan losses is far higher than we've seen maybe ever and almost certainly the highest since the war," added Robin Monro-Davies, managing director of IBCA, Ltd., the London based international bank credit rating service.
Banks' difficulties are showing up most clearly in declining earnings, shabby credit ratings, reduced lending, and big cut-backs in staff.
In the United States, more than half the 25 biggest banks reported weaker first-quarter earnings.
The picture is little different in other countries.
Earnings at big Japanese banks fell 23.4% on average for the year ended March 31, while earnings at French banks last year fell by as much as 53% at big banks like Banque Nationale de Paris. Banks in other countries, like Britain, fared equally poorly.
"Strategies at most banks are far less clear than they were 10 years ago," Mr. Bellanger noted. "Very few are moving in one direction or other."
With profits under pressure, most banks are playing safe and sticking close to home.
Some bankers go so far as to predict that the current downturn, coupled with rising capital and funding costs, could lead to a major retrenchment by banks from international operations.
Leaving the U.S.
"Foreign banks will reduce their presence in the U.S. market and many will leave altogether," Barry Sullivan, chairman of First Chicago Corp., told bankers at the International Monetary Conference in Osaka in June.
Banks are also limiting new lending.
Over the first five months this year, international loan syndications, or cross-border loans arranged by groups of banks, fell 14% to $117 billion, according to figures compiled by International Financing Review, an publication affiliated with American Banker.
In terms of total international assets - including loans, securities purchases, and money-market claims on related offices abroad - the picture is somewhat more favorable. Even so, only the well-capitalized European banks posted substantial expansion in the category. Germany, Italy, and France showed the largest gains.
According to a June report by the Basel-based Bank for International Settlement, European banks accounted for more than 75% of last year's $787 billion expansion in international bank assets, up from an average of 35% of the growth in preceding years.
Japanese banks accounted for less than 20% of last year's increase, down from 39% of 1989's gain, the BIS added in its report.
Banks are also moving to streamline their operations and trim thousands from their payrolls.
Citicorp, the biggest U.S. banking company, is cutting 8,000 jobs and Chase Manhattan Corp. 5,000. Chemical Banking Corp. and Manufacturers Hanover Corp., which are planning to merge into a $135 billion-asset bank, plan to cut 6,500 jobs as part of an effort to save $650 million in annual expenses.
Executives at NationsBank - the $118 billion-asset concern to be formed under the proposed merger of NCNB Corp. and C&S/Sovran Corp. - plan to save $350 million a year over three years. NationsBank may sever as many as 6,000 employees, about one-tenth the combined work forces.
Europe Also Affected
Similar trends are under way in Europe.
In Spain, Banco Bilbao Vizcaya has trimmed 5,000 jobs out of a work force of 35,000 over the last two years.
In France, where operating costs rose by an average 6.5% last year, the country's central bank has told bankers they must do more to control expenses.
Despite the gloomy outlook, agencies and analysts who monitor the banking industry see few grounds for concern.
A survey released in July by Price Waterhouse found that most major banks will meet international capital to asset requirements by the end of next year.
The capital requirements, agreed on by major central banks in July 1988, weigh assets according to risk and require banks to have a core equity equal to 4% of the risk and a total capital equal to 8% of the risk.
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