The chief risk officers at two banking companies said they expect commercial credit quality to deteriorate slowly over the next year as lenders have a tougher time recovering troubled loans.
Donald Truslow of Wachovia Corp. and Cindy Manzetti of Fifth Third Bancorp said Friday at the Merrill Lynch Chief Credit Officers' Forum that they expect more banking companies to build loan-loss reserves.
Both executives said they do not anticipate any sudden or drastic increase in problem commercial loans.
"There have been some loosening of standards, competition has been pretty intense in the space and is growing in the space, and I just have to think that there has to be some fallout from that," Mr. Truslow said. "To the extent we do get a little bit of a softening of the economy, I just wouldn't be surprised for there to be some isolated credit problems here and there."
Some fallout is already evident. SunTrust Banks Inc., which operates in some of the same markets as Wachovia, said last month that it likely would reclassify a $200 million corporate loan to nonaccrual status this quarter. However, L. Phillip Humann, the $181 billion-asset Atlanta company's chairman and chief executive, said the loan is not indicative of the portfolio's condition.
Mr. Truslow said that over the past two years some banking companies have recovered loans that had seemed lost. The borrowers have refinanced their way out of trouble, because banks have been eager to book new loans in the competitive environment, he said.
In fact, his $554 billion-asset Charlotte company had a surprise second-quarter recovery, he said.
"Last quarter we had a fairly significant telecom credit we recovered. We kind of called it the Lazarus loan - it sort of rose from the dead," Mr. Truslow said.
Ms. Manzetti said that even though she has not seen loosening in underwriting standards, competitors have been easing the terms in their lending covenants.
"We're seeing some slowdown in housing and, obviously, the auto industry is making the news, even this morning - the knock-on effect of those things is really something to watch, and we think will have some further impact in the next 12 months," she said.
Ford Motor Co. announced Thursday afternoon that it would cut 44,000 jobs by the end of next year.
Fifth Third said in a quarterly update filed Sept. 11 with the Securities and Exchange Commission that it expects its net chargeoff rate to "return to a more normal mid-40s basis-point range." [See story on this page.] The $106 billion-asset Cincinnati company's second-quarter chargeoff rate was 0.37%.
But Mr. Truslow said predicting a turning point in commercial credit quality for the banking industry is difficult.
"I've probably been in the camp of sort of predicting some sort of turn in the credit cycle now for the last couple of years, and I think I've blown any kind of credibility I have within Wachovia for forecasting," he said.
"I am still in the camp that we are in historically very, very low levels and can't maintain the level of credit quality of where we've been," Mr. Truslow said. "And I wouldn't be surprised that as we move into '07, we would see some sort of headwind coming out of credit costs."
