Just as the pace of commercial loan defaults slows, banks might find themselves on the brink of another problem: deteriorating consumer loan portfolios.

Lenders that are heavily involved in consumer-related business lines such as credit cards, mortgages, or auto loans can expect consumer credit erosion to become a concern, industry analysts say. Low consumer confidence, heavy layoffs, and an increase in personal bankruptcies are fueling the consumer credit deterioration, according to Lori Appelbaum, an analyst at Goldman, Sachs & Co. who has been monitoring the lending business closely since the middle of last year.

As if to drive home her point, Ms. Appelbaum downgraded her rating on Bank One Corp. stock Tuesday to "market perform" from "market outperform" because the Chicago company has higher exposure to the credit card industry and subprime consumer lending.

Ms. Appelbaum said she would have lowered her ratings on the stocks of other banks that have mortgage operations, but she only covers one - FleetBoston Financial Corp. - which is looking to sell its mortgage business.

The Federal Reserve Bank's recent survey of senior loan officers, made available in early February, showed early signs of a pullback. "Lending conditions also firmed noticeably on the consumer side," the Fed said. Thirty-five percent of the bankers told the Fed that demand for all types of consumer loans had weakened since November. And since the less risky borrowers leave the pool in tight times, banks are left lending to people who are less likely to pay back their loans.

"Everything looks OK right now, but there could be an upswing" in defaults, said Bert Ely, a consultant in Alexandria, Va.

Fannie Mae and Freddie Mac have been so focused on getting people into homes that a lot of people on the edge economically have mortgages, Mr. Ely said. If the economy slows and these people lose their jobs, he said, there will be trouble. "There could be an increase in mortgage defaults" and home equity loans could pose a problem as well, he said.

Ms. Appelbaum said banks with commercial loan portfolios are still prioritizing those problem credits over potential consumer losses, but at least the commercial loan market is understood at this point.

David D. Gibbons, deputy comptroller for credit risk at the Office of the Comptroller of the Currency, is still more worried about commercial loans, but said he understands why people are starting to raise red flags on consumer credits.

He noted that the same loss rate hits harder and faster in commercial lending because those loans tend to be big and tend to blow up unexpectedly, whereas consumer credit trouble comes on slower and in smaller pieces.

Consumer loan losses have "only recently started a small uptick," Mr. Gibbons said. "I hate to say it's a trend, because it looks very seasonal right now. There is always a fourth-quarter uptick in delinquencies."

Nonetheless, bankers should be watching higher leveraged consumers, higher loan-to-value credits, unsecured products like credit cards, and consumers with the weakest credit records, Mr. Gibbons said.

"An unprecedented amount of consumer credit has been granted" and a lot of it has been lent to people with less ability to repay, he said. "You've got a sector of the market, families with incomes of $50,000 and less, carrying particularly high levels of retail credit."

Consumer leverage is fairly high now compared with where it has been, he said. Debt service payments as a percentage of disposable income is 13.7%, up from 11.7% in 1992, but down from its last peak in 1986 when it was 14.2%.

And the trend may encourage companies that are getting out of consumer lending businesses for other business reasons. FleetBoston Financial Corp., for example, has been shopping its mortgage business around for about six months, and wants to sell it because it is no longer pleased with the low-margin operation. PNC Financial Services Group, GE Capital Corp., and Advanta Corp., have all exited mortgage lending or servicing in the past six months.

Wachovia Corp. put its $8 billion credit card portfolio up for sale this month because of profit concerns. The card industry is increasingly consolidated in the hands of the so-called monoline credit card companies, such as MBNA Corp. and Capital One Corp. First Union Corp. and KeyCorp have also sold their portfolios.

Not everyone is pessimistic and cautious. "The industry is still fundamentally very strong, very healthy, and very well capitalized," Jim Chessen, chief economist at the American Bankers Association said. "The industry is positioned to deal with whatever problems may arise, be they consumer or commercial."

Barbara A. Rehm contributed to this report.

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