It's Too Soon to Celebrate, Analyst Says

Despite signs that loan-loss provisions may have peaked for most major banks, consultant David C. Cates remains bearish on the outlook for the banking industry.

Mr. Cates, the president of W.C. Ferguson & Co., said that even if the worst is over for most institutions, big problems still remain that will strain the banking system. Among them:

* Some 74 banks are now near insolvency, and bailing them out will probably cost at least $2.5 billion - which will have to be borne by surviving banks.

* California banks will soon experience some of the deterioration in asset quality that beset eastern institutions in 1990.

* A number of large bank holding companies still need painful medicine - management changes and, in some cases, government assistance - to survive.

"Even if there is a general recovery, we are still left with the problems I have outlined," Mr. Cates said.

The Case for Optimism

While he sees a half-empty cup, other experts have recently become guardedly optimistic.

For example, a recent study by Keefe, Bruyette & Woods Inc. showed that after sharp increases every quarter since the end of 1989, nonperforming assets for a composite of the industry increased by a scant 0.5% in the second quarter.

"There will be a banking industry," said David Berry, an analyst at Keefe Bruyette.

"Some banks just aren't going to make it," he said. But "there are a number of banks that are going to be very healthy."

Problems Masked

Similarly, Thomas Brown, an analyst at Donaldson, Lufkin & Jenrette, says the industry's earnings have begun to recover because banks don't have to spend so much to deal with credit problems.

But Mr. Cates says industrywide averages mask the problems presented by the segment of the industry now in trouble.

"Taking an industry composite doesn't tell the whole story because you can't distinguish the unhealthy pocket from the healthy majority," he said. Working through the remaining problems will tax the whole system, he added.

Insolvency Defined

Ferguson defines a company as near insolvency if it lost money in the first quarter and its total equity capital equals less than 2% of assets.

The median return on assets for the 74 institutions in this category is minus 2.42%, while the median ratio of tangible capital to tangible assets was a scant 0.78%.

The Middle Atlantic and New England states hold far and away the greatest number of troubled banks, Mr. Cates said.

A total of 33 institutions in those regions are near insolvency, and they hold 94% of the total of $25.3 billion in assets on the troubled bank list.

Other analysts agree that most of the banking industry's problems are concentrated in the East.

One Out of Four May Fail

"What I'm looking at in New England is that one out of every four financial institutions could be out of business in the next 24 months," said James Moynihan, an analyst at Advest Inc. "The Northeast-New England region is in the worst situation of any region in the country."

He said he expects that five of the big savings banks in New Hampshire and at least three institutions in Bridgeport, Conn. - Citytrust Bancorp, Mechanics and Farmers Savings Bank, and the Bank Mart - will not survive as independent concerns.

But the region's woes do not necessarily signal that the industry is weakening further, said Mr. Berry of Keefe Bruyette.

Even if certain regions are deeply troubled and a number of institutions are not likely to survive long, "we're at the point where we can separate the wheat from the chaff," he said.

PHOTO : Weakness In the Northeast

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