CHICAGO - When Household Finance Corp. opened its first bilingual branch in a Hispanic neighborhood on the city's north side in June, it was a homecoming for the consumer finance company.
Stung by commercial loan losses and high delinquency rates in the 1980s, Household Finance withdrew from most urban markets five years ago. It shut hundreds of expensive-to-maintain inner-city branches in places like Chicago, New York, and Detroit.
But the unit of Household International, the nation's No. 1 consumer finance company with $32.4 billion in assets, is making a cautious but determined march back into urban areas.
Big Opportunity Seen
In contrast to some banks, whose expansion plans call for avoiding cities and targeting acquisitions that enrich their share of suburban deposits, Household sees gold in the nation's asphalt jungle.
"There's a huge opportunity in going back into the inner city," said Robert F. Elliott, group executive and head of the U.S. consumer finance group.
Household Finance, which started making personal loans in 1878, has 500 offices, mostly in suburbs and small towns across 35 states.
But in the last five months it has opened four bilingual offices in places like San Antonio and Sante Fe, N.M., targeting Spanish-speaking people who are hew to the United States and have no banking relationships or credit history.
A fifth bilingual office - in East Los Angeles - opens this month. Household is adding a second office near the riot-torn South Central district, aimed at African-Americans. The company plans to open more such offices in New York, Chicago and Miami next year.
Competition Heats Up
For bankers who continue to target customers in urban areas, Household's reentry means more competition.
"We have overlapping customer bases," says John Russell, executive vice president at Banc One Corp. Like Household, the Ohio-based bank "looks at the inner city as a business opportunity," he said.
Household faces the same problems as banks in operating branches in the inner city, where real estate, labor, and security are expensive. What's more, catering to lower-income consumers - particularly those with little or no credit history - risks higher future delinquencies.
But Mr. Elliott, a 30-year veteran of Household, is willing to take the gamble out of both necessity and conceit.
Household is emerging from a two-year dark period, when delinquencies were at an all-time high, problem realty loans stacked up, and layoffs and branch closings followed.
Lax Underwriting
The problems stemmed from poor underwriting standards and diversification into commercial real estate lending during the last decade. By 1991, net income had slid to $149.8 million, versus $246.7 million in 1988. Return on equity dipped to 8.1% in 1991 from nearly three times that level in 1988.
Profits at Household's banking and finance segment, which contributes 80% of the company's total earnings, suffered. The unit, which includes Household Finance, a federal savings bank, a mortgage company, and a credit card unit, dropped 30% last year to $201 million compared with 1991.
The company started cleaning house. By the end of 1991, it had shut more than 600 offices and slashed some 900 jobs. Real estate problems linger, but the company is on the mend after returning to what it knows best: providing high-interest loans to people who can't get bank loans.
Tougher Standards
"They've made a tremendous amount of progress by changing their underwriting standards," said Gary Gordon, an analyst at PaineWebber Inc. "Delinquent loans are now starting to bottom out, and chargeoffs finally started to decline this year."
Core consumer lending businesses and successful new ventures have paid off. Aggressive marketing has made Household one of the largest providers of home equity loans, with a $7.5 billion portfolio.
A savings bank acquisition program began in 1989. Household Bank now has 171 branches in seven states. With $9.1 billion in assets and $6.5 billion in deposits.
This year the company launched the General Motors credit card, one of the most successful card rollouts ever. The program now has five million accounts and $3.9 billion in receivables.
Income from banking and finance operations was up 42% to $78.8 million in the third quarter, compared with a year earlier. The entire company had earnings of $75.5 million in the quarter, up 44%.
But long-term success in the consumer lending division is in not guaranteed. Household Finance's traditional customer base, composed of 25-to-50-year-olds with an annual income of between $20,000 and $48,000, is shrinking.
"Most of our customers are younger and as they get older and more established some of them bleed off," said Mr. Elliott. "We compete with other finance companies for the customers, but we compete with the banks for retention."
To boost profits, Household must find new customers. The company sees big opportunities in the fast-growing Hispanic market. With 25 million people, the Hispanic population in the U.S. is nearly as large as the entire population of Canada.
But the company will be playing catch-up with some of its competitors. Both banks and other finance companies, such as Beneficial Corp., already have programs and offices designed to attract Spanish-speaking consumers. Other consumer finance companies like ITT Financial and American General are already in the inner cities.
High Tech, Low Overhead
Mr. Elliott is undeterred. He says Household can win its inner-city gamble because low operating costs and high-tech inhouse scoring models will allow the company to be profitable.
By consolidating back-office systems for underwriting, processing, and collections into regional centers and employing technology in branches, Household has lowered total operating expenses to 3.3% of averaged receivables in 1992 from more than 5.1% in 1987.
By comparison, Keefe, Bruyette & Woods Inc. said the median ratio of noninterest operating expenses in the third quarter for the 50 largest banks was 5.9% of average loans.
"We have brought our costs down so low that it becomes a very viable option to go into the inner cities and charge customers the same rates we charge all over the U.S.," said Mr. Elliott.
With delinquencies down, Household's banking and finance sector reported total consumer net chargeoffs of 2.86% of average receivables in the third quarter, compared with 3.46% a year ago.
Though much improved, Household still lags behind competitors. Chargeoffs at Beneficial Corp., the Wilmington, Del., consumer finance firm, were one-third of a percent for the most recent period.
But technology and high-tech risk management systems have put Household out in front of its peers in productivity.
"Their effort to centralize both underwriting and collections has paid off, in that it allows branch managers to produce business as opposed to be engaged in paperwork," said Sam Liss, an analyst at Salomon Brothers Inc. "There's no question that they have higher productivity per professional."
Mr. Liss views Household's foray back into cities as a "controlled experiment" that should be carefully monitored.
Mr. Elliott is aware of the risks, saying bluntly: "It's a pure crapshoot."
