ROA Suffered as U.S. Share Doubled in '80s, OCC Says

WASHINGTON -- Foreign-owned banks have paid a high price to gain market share from their U.S. competitors, according to a study released Friday by the Comptroller of the Currency.

Foreign-owned banks have consistently made lower returns than U.S. banks, the OCC found. They also oprate less efficiently than U.S. rivals and have more problems with credit quality, the study concluded.

From 1983 through 1992, the return on assets of domestic banks outstripped that of their foreign rivals every year. In 1992, the average return on assets was 0.95% at domestic banks and 0.03% at foreign-owned banks.

Sacrifices Made

"Foreign banks' profitability persistently lags that of U.S.-owned banks," the study states. "In addition, while U.S.-owned banks saw a surge in profitability after 1991, foreign-owned banks in the U.S. experienced profit levels below their average for the 10-year period 1983-92."

Daniel E. Nolle, an OCC economist, concluded that foreign-owned banks have sacrificed profits to gain market share here.

The assets of foreign-owned banks increased steadily during the 1980s and early 1990s as the the number of branches and agencies increased fivefold, Mr. Nolle found.

Foreign-owned banks' grew to 23.7% of all U.S. banking assets in 1991 from 13% in 1980, according to the study.

From 1983 to 1991, the amount of commercial and industrial loans held by foreign-owned banks quadrupled to $346 billion. Mr. Nolle noted in an interview that foreign-owned banks rarely originate C&I loans, opting instead to buy chunks of loans made by domestic banks.

"Foreign banks have not originated many loans," he said. "They are very heavily into participations."

Still, the surge in foreign-owned bank C&I lending, coupled with a $55 billion decline by U.S. banks in 1991, doubled the foreign banks' market share. In 1983 foreign-owned banks accounted for 19% of business loans in the United States. By 1991, that share stood at 45%.

But a shift occurred in 1991, Mr. Nolle found. Offshore bookings continued to increase gradually, but were offset by a decline in lending at U.S. offices of foreign banks.

'Less Astute Management'

"The growth of foreign market share appears to have peaked in mid-1992, as increases in offshore lending slowed substantially and onshore lending actually declined," the study states.

Mr. Nolle also found that foreign-owned banks are less cost efficient than domestic banks.

"The relatively poor performance of U.S. subs of foreign banks, versus similarly structured U.S.-owned banks, strongly suggests less astute management ability on the part of foreign banks," the study states. "That conclusion is at odds with the view that foreign banks stand at a competitive advantage compared with U.S. banks."

Foreign-owned banks in the U.S. traditionally have had fewer credit quality problems than U.S. banks. But that changed in 1989, Mr. Nolle noted. In particular, foreign-owned banks saw their noncurrent C&I loan rate increase sharply after 1989, according to the OCC study.

Foreign-owned banks also moved deeper into real estate lending in 1989 through 1991 just as U.S. banks were retreating from that turbulent market. Mr. Nolle noted that this trend was widespread, across banks from many countries, not just Japanese banks in the troubled California real estate market.

"It would appear that decision-makers at foreign banks had even more trouble than U.S. bankers in anticipating problems in banking markets," the study states.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.