Hibernia’s Early Start Helps Clean Credit Slate

Hibernia Corp., one of the first big regional banks to suffer from the commercial credit problems that have plagued the industry in recent years, has slashed its exposure to syndicated loans and is tightening credit, according to chief executive J. Herbert Boydstun.

Mr. Boydstun, who took the top post last December, told investors at a conference in Washington Friday that the New Orleans company had reduced syndicated lending — loans of at least $20 million shared by three or more banks — from about 20% of all loans in 1998 to 8.9% as of June 30. In the past year its syndicated loans have dropped 33%, to about $1 billion, he said. The company first reported problems in March 1999.

Defaults on large commercial loans in health care, telecommunications, and other industries have stung the nation’s banks over the past few years, and hit smaller companies like Hibernia especially hard.

And though Mr. Boydstun is eager for Wall Street to sit up and take notice of the good news, he warned that Hibernia is not out of the woods yet.

The company is pulling back, but bad syndicated loans still account for about half of its nonperforming loan total. And as the economic downturn reaches other segments, Mr. Boydstun said, Hibernia has started to note an increase in bad loans to small businesses and consumers. He said he is watching those two areas closely as economic weakness persists, and that he expects to see an increase in problem commercial loans.

But Hibernia’s loan-loss reserves are up, and so are fees from nonbanking businesses such as insurance and investment banking. “One of our goals is to diversify our revenue sources by increasing fee income. And our revenue is more diverse today than ever before,” Mr. Boydstun said at the conference, which was sponsored by Arlington, Va., investment bank Friedman Billings Ramsey.

In the second quarter fees accounted for 31% of Hibernia’s revenues — still less than the 35% average among the 20 institutions the bank compares itself to, but up from 26% two years ago.

Mr. Boydstun said the $16 billion-asset company has slimmed down its lending portfolio through loan securitizations, by tightening credit standards, and by making smaller commercial loans “in the range of $10 million,” instead of the previous $30 million to $35 million.

“Now we look more like our peers when it comes to asset quality,” he said.

Despite these apparent signs of progress, Mr. Boydstun said he thinks investors have not grasped the change. The company’s stock has risen more than 30% over the past year and is one of the industry’s best performing this year, but its price-to-earnings ratio (about 12.7 as of Aug. 31) remains near the bottom of its peer group, he said.

“I’m hopeful the market will recognize the value of our franchise, our strategies and the opportunities they provide, and will reward us with a higher multiple. I really think that there is much room for improvement,” Mr. Boydstun said.

Jefferson Harralson, an analyst at SunTrust Robinson Humphrey in Atlanta, said Hibernia has made big strides in overcoming its commercial loan troubles. Mr. Boydstun “has made a significant effort to reduce risk in their loan portfolio,” Mr. Harralson said, though he noted that with syndicated loans at 8.9% of all loans, the company’s exposure remains above average for a bank of its size.

Because Hibernia was one of the first banks to report its commercial loan troubles, it may be further along in fixing them, Mr. Harralson said. “They been more focused on problem credits before other [banks], and their credit quality has actually been improving over the past four quarters,” he said.

Nonetheless, credit quality and loan-loss reserves could be a major factor in determining how Hibernia’s earnings fare the rest of the year, Mr. Harralson said.

Mr. Boydstun said he is comfortable with Wall Street’s earnings expectations for this year, and that third-quarter earnings — which are due in a few weeks — should stay at least even with the second quarter, when Hibernia earned 34 cents a share. Analysts expect Hibernia to earn $1.36 a share for the year, and 36 cents for the third quarter, according to First Call/Thomson Financial.

While Hibernia’s stock price is up considerably this year — 32% — analysts say at least part of the rise is from speculation that Hibernia could become a takeover target. Mr. Boydstun said in May he might be willing to sell the company, and improvements such as those he outlined Friday could help that happen, according to Mr. Harralson.