Business Loans Blamed for Lower Profits

WASHINGTON - A 34% surge in bad commercial loans and $2.3 billion of losses on securities sales combined to break the banking industry's eight-year streak of record earnings last year, according to data issued Wednesday by the Federal Deposit Insurance Corp.

A preliminary release of the agency's yearend earnings report showed that despite a 2.1% increase in net operating income, to $72.8 billion, bank earnings last year fell by $380 million, or 0.5%, to $71.2 billion. The agency attributed the losses on securities sales to declining interest rates, which reduced the value of fixed-rate securities. By comparison, the industry earned $181 million from selling securities in 1999.

Loss provisions for all loans jumped 33.8%, to $29.3 billion, the highest since 1991. The actual amount of loans charged off during the year rose 15.7%, to $23.6 billion. About $7.7 billion of those bad loans were written off in the fourth quarter, a 27% increase from a year earlier.

Bad commercial loans accounted for 39% of the loans charged off in the fourth quarter and 33.2% of chargeoffs for the full year.

Ross Waldrop, chief of the banking statistics section of the agency's research divisions, said the trend in souring commercial loan portfolios appears to have momentum.

"The increase in loss provisions reflects increasing credit quality problems in loans to commercial and industrial borrowers," he said. "The expectation is that in the near future it will continue to rise and will continue to have a negative effect on earnings. It will probably result in lower earnings; it will not result in net losses or failures."

At yearend, 1.67% of all commercial loans were noncurrent, up from 1.17% in the previous year.

Mr. Waldrop said that the problems with commercial loans are centered primarily on large domestic institutions. Only 38.8% of banks reported an increase in noncurrent commercial loans, but those banks held 77.9% of the industry's commercial loan portfolio.

The problems are directly reflected in bank earnings. According to balance sheet data, 67.9% of banks reported higher earnings last year than the year before. However, three of the five largest U.S. banking companies, and ten of the 20 largest, reported declining earnings.

Among the hardest-hit were First Union Corp. and Bank One Corp. If those two institutions were removed from the FDIC's calculation, the industry's earnings would have increased by 8.5% last year.

Despite the decline in earnings and increasing concerns about commercial loan portfolios, the FDIC took pains to note that earnings remained at near-record highs, and chargeoffs are still occurring at relatively low levels.

In fact, fourth-quarter earnings last year were $17.8 billion, $91 million more than in 1999, making it the fifth-best quarter in the industry's history.

A strong fourth quarter also helped offset an otherwise tough year for the thrift industry, the Office of Thrift Supervision reported Wednesday.

The industry "had a very good fourth quarter and really, a very solid year 2000, which is extremely impressive given the very difficult conditions the industry was facing, particularly in the first three quarters," OTS Director Ellen Seidman said.

Net earnings of $8 billion in 2000, down just 2.4% from the record year of 1999, are a good sign for the future, she said. "In the declining interest rate environment that we are seeing, the industry is well poised to take advantage of the next mortgage refinance boom."

Not all the news was good, though. A growing number of problem thrifts, those with Camels ratings in the 3-to-5 range (1 being the top score and 5 the worst), have drawn the agency's attention.

Ninety-eight institutions with $29.8 billion of combined assets fell into the 3 category last year, up from 68 with $21.6 billion of assets a year ago. Higher interest rate risk exposure and credit quality concerns are the main culprits in the downgradings, the agency said.


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