Are banks' loan-loss reserves as formidable as they look? No, says a veteran analyst who is worried about growing consumer debt difficulties.
Under current practice, banks do not list problem credit card or other consumer loans as nonperforming. If they were to do so, their reserves would appear less plentiful, said George M. Salem of Gerard Klauer Mattison & Co., New York.
He studied eight major banking companies active in credit cards and found that average reserve coverage fell 22.3% when nonperforming-loan figures were adjusted by formula to reflect card loans 90 days past due.
Still, banks were six times as well reserved as specialized bank card issuers.
The analyst, who feels credit cards are "the No. 1 problem in banking right now," cautioned investors that negative surprises could be ahead.
On average, reserve coverage for the banks studied dropped to 1.9 times nonperformers from 2.5 times after Mr. Salem normalized figures by adding 2% of card outstandings to the nonperforming category as a proxy for card loans 90 days past due.
Wachovia Corp. had the largest reserve coverage adjustment under Mr. Salem's formula, down 61.3%, but its normalized reserve multiple was still well above average at 2.7 times nonperformers.
Citicorp, the nation's biggest card issuer, had reserve coverage of 1.5 times nonperformers after a 20.5% downward adjustment. That was the lowest among banks, but still considerably above the average multiple of 0.3 times nonperformers at the monoline issuers.
Mr. Salem forthrightly acknowledged that his views "differ from the consensus." Most Wall Street analysts, even those with bearish attitudes, regard bank reserves as adequate.
"You cannot say banks are underreserved right now," said Lawrence W. Cohn of PaineWebber Inc., who has warned investors for some time to underweight bank stocks in their portfolios.
What concerns Mr. Cohn is that many banks soon will have to kick their quarterly habit of drawing down ample reserves to bolster profitability. That could dampen the industry's earnings outlook and hurt stock prices.
Mr. Salem thinks investors need a better picture of where bank reserves and capital stand right now.
He believes delinquent consumer loans should be counted by banks as nonperformers after 90 days, which would make reserve coverage ratios used by the investment community more veracious.
The analyst said he feels the Securities and Exchange Commission, which annually reviews allocation of loss reserves, should revise its bank disclosure guidelines to require such data.
In addition, Mr. Salem said, banks ought to provide figures on the aging of delinquencies from 30 to 60 to 90 days past due as well as on the "vintage" of chargeoffs - meaning the year the credit card involved was issued.
If delinquencies continue to rise, the analyst said he worries that bank supervisors may soon force the issue. Mr. Salem said the regulators may demand that banks build capital and reserves to reflect rising risks and to provide for securitization activities - sinc risk remains with the originating bank.
