Recession Has Slammed Brakes On Growth in Consumer Lending

As the recession gathered steam in 1990, consumer loan growth among the top 100 banks in the field slowed to its lowest rate in at least four years.

An American Banker survey shows that the group's consumer portfolio increased by 10.5% last year, after a 17.5% rise in 1989.

Further Slowdown Seen

Although some signs of an economic recovery have arisen in recent weeks, consumer lenders and analysts suggested that 1991 is shaping up as an even slower year than 1990. "Consumer debt is at an all-time high, and people just can't afford big purchases," said George B. Williams, a senior vice president of AmSouth Bank, Birmingham, Ala.

Among the major findings of the study:

* Bank of America has tightened its grip on the No. 1 spot in consumer lending, after boosting its consumer portfolio by 23% in 1990, to $34.3 million.

* Home equity loans remains the fastest-growing asset category on banks' books, with four California banks pacing the industry. Home equity loans ballooned by more than 40% last year at the banking subsidiaries of BankAmerica Corp., First Interstate Bancorp, Wells Fargo & Co., and Security Pacific Corp.

* Growth of credit card balances at all banks fell to a mere 1.5% last year, from 11.7% in 1989. The credit card boom of the 1980s has clearly subsided. In addition, experts said, banks are increasingly securitizing their card receivables, rather than holding them.

Shortening the Bottom Line

The overall cooling of consumer lending, combined with a rise in consumer-loan delinquencies, is almost sure to hurt the industry's bottom line. For the past 10 years, as securities markets have chipped away at demand for commercial loans, consumer lending has emerged as a crucial component of banks' earnings.

"The consumer banking divisions, as separate profit centers, by and large will show absolute dollar declines this year in their earnings," said Charles W. Peabody, a bank analyst at Kidder, Peabody & Co. "They won't lose money the way real estate divisions are, but they will see a decline in their earnings."

Mr. Peabody predicted that consumer banking profits at Citicorp, the nation's largest banking company, will fall to about $750 million this year, from $1 billion in 1990. A Citicorp spokesman declined to comment on the estimate.

3% Growth Rate in '91?

Among all commercial banks, consumer loan growth slowed to about 7% in 1990, from 10% or more in each of the previous five years, according to the Federal Deposit Insurance Corp. And some experts said they would not be surprised to see the growth rate drop to 3% this year.

Meanwhile, delinquencies have been climbing on virtually all types of consumer credit. Among seven types of consumer loans, 2.67% were at least 30 days past due at March 31, up from 2.57% at yearend, the American Bankers Association recently reported.

Despite the problems facing consumer lending, growth last year was well above the growth rates of other types of credit. Banks' loans to businesses, for example, actually declined.

As a result, consumer loans -- including first and second mortgages, credit card debt, auto loans, and personal loans -- accounted for 38% of all bank loans, up from 37% in 1989 and 31% in 1985.

A Field of Opportunity

Moreover, some bankers still see plenty of opportunity in consumer lending, particularly in home equity loans. While the growth of these loans fell last year at the top 100 banks in the field, it was still an impressive 23%.

Consumers, who once borrowed against their homes only as a last resort, have become much more comfortable with the idea, lenders and analysts say.

"People are saying it's okay to use your home to finance a car, a vacation, education, or whatever," said Cathi Raffaeli, a vice president at Chemical Bank, New York.

"It's a very sensible loan," said David Olson, vice president of research for SMR Research, Budd Lake, N.J. "The lenders don't want to do unsecured loans in this high-risk time, and it's a good for the borrower. After tax, it's really cheap -- there's nothing close."

Home Equity Nonperformers

For the first time, banks were required to disclose their nonperforming home equity lines of credit at the end of the first quarter. According to preliminary data from the the FDIC, 0.75% of banks' lines were past due by at least 90 days or on nonaccrual status. That was roughly half the rate indicated for first mortgages.

Among the leading banks in home equity lines, nonperformers ranged from 0.00% at Security Pacific to 3.11% at First Fidelity Bank, Newark, N.J.

BankAmerica has relied heavily on consumer banking to stage the biggest corporate turnaround in banking history. As recently as the mid-1980s, the company's very survival was in doubt.

The bank has been particularly active in home mortgages, underscoring a push by many banks to fill the shoes of dead or dying thrifts. At yearend, it held $19 billion worth of mortgages, far more than any other bank. Indeed, the holdings trailed those of only two thrifts, Home Savings of America and Great Western Bank.

When banks are grouped by holding company, however, Citicorp is the leader in both mortgages and all other types of consumer loan. Its nine banks held $50.2 billion of consumer loans at yearend, versus $39 billion for the six banks of BankAmerica. [Graphs Omitted]

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