It now appears certain that the negative effects of the Federal Reserve's interest rate increases will be evident at the end of this quarter at several major banking companies - in their venture capital units and, perhaps more important, in their overall asset quality.
Writedowns will not hit every banking company with a venture capital unit. Wells Fargo & Co. in San Francisco and FleetBoston Financial Corp. in Boston, for instance, account for gains and losses of an investment only when there is a material event, like a takeover or a sale of the security.
But successive rate increases by the Federal Reserve Board in an attempt to slow the economy have sparked a selloff in technology stocks and had the effect of cooling off what was a booming business for some of the largest U.S. banking companies - private equity investing. For companies that have been marking up the value of their portfolios in recent quarters, a reversal is expected.
Bank of America Corp. in San Francisco, which reported more than a $500 million gain from its private equity business in the first quarter, is likely to substantially mark down gains unless the Nasdaq stock market regains its pre-April levels, analysts said. Chase Manhattan Corp. could also have to mark down its portfolio unless the Nasdaq makes a full-strength comeback by the last day of the quarter. Both companies use an accounting method that allows them to record realized and unrealized gains during a period.
"I would anticipate that everyone [who accounts for gains] on a marked-to-market basis would have losses," said Lawrence Cohn, an analyst at Ryan, Beck & Co.
Of course, that does not mean negative numbers would pop up on income statements. Mr. Cohn said sales of stock held in the portfolio and gains on private investments can offset losses.
Apart from venture capital investments, which affect only a few banking companies, analysts are beginning to examine whether asset quality in general shows signs of deterioration after the Fed rate increases. The Fed's efforts have already taken a toll on bank profits from mortgage, home equity, and other consumer finance operations.
"I think focus will shift from interest rate concern to concern about asset quality," said John Otis, a bank analyst at Bear, Stearns.
A cooling economy, combined with high loan growth to small- and middle-market companies over the last few years, means that bank companies will probably be carrying higher levels of problem loans this year, Mr. Otis said.
Bank of America, among other big regional and money-center companies, has told analysts it expects expect an increase in poor-quality assets. But although such concerns have been floated for several quarters, some analysts say that the second quarter is likely to be a key marker.
At many of the largest banking companies, "there should be a noticeable pick-up in problem commercial loans due to high-interest rates," said Michael Mayo, an analyst at Credit Suisse First Boston. While banks have recently tightened lending standards, those moves follow years of looser practices. "Now they're playing catch-up," he said.
But signs of deteriorating asset quality in the second quarter could be nothing more than incremental. David Hilder, a banking analyst at Morgan Stanley Dean Witter & Co., said while banks have been suggesting a slow but steady rise in the level of chargeoffs over the course of the year, he is not expecting a dramatic leap in the second quarter.
Mr. Hilder pointed to the relative stability of non-performing assets and net chargeoffs over the few quarters, and to the continued growth of the economy, even if there are signs of it slowing.
Even with higher nonperforming assets, "banks are much more able to digest even slightly higher levels of credit losses than they used to be," he said.
