Slim Pickings for Banks Engaged In Securitizing Customers' Assets

The eerie quiet along the loan securitization front over the past year reflects both the robust health of most banks and the maturing of this area of the banking business.

For banks pursuing asset-backed securities as an investment banking- related line of business, by managing or co-managing the packaging and sale of loans, major growth still lies in the future.

It is "a very small activity" at most money-center banks, said Francis X. Suozzo of S.G. Warburg & Co. Citicorp was the largest in the field among banks last year, handling four issues and garnering slightly under 2% of the market.

Securitization remains alive and well, but the business climate right now for banks themselves has effectively placed a lid on any enthusaism.

"In general, with banks' capital levels as high as they are right now there is less need to securitize. That is the main reason it has receded as a topic of industry conversation," said Michael L. Mayo, regional banking analyst at Lehman Brothers.

Just five years ago it was a major subject of interest. At that time, banks regarded securitization of their assets as an important mechanism for freeing up scarce capital.

And the money-centers, along with some superregionals, saw the business as an opportunity to expand investment banking activities in an area where they had expertise.

Besides Citicorp, the major banking industry players are First Chicago Corp., Chemical Banking Corp., Chase Manhattan Corp., NationsBank Corp. and Bankers Trust New York Corp.

But these days banks are willing and able to keep more of the loans they make, especially since they look like some of the best deals around in the current economic and interest rate environment.

"Particularly in the area of credit cards, where securitization is most often heard about, these assets look superior to a lot of the alternatives," said Diane B. Glossman, an analyst at Salomon Brothers Inc.

"Many banks right now seem to be quite comfortable in building up some credit card-related concentration," she said. "And they could always securitize in the future if things change.

"Basically it comes down to a lack of need for special funding," she said, "and probably also the relative weakness in some categories of loan growth."

Securitization is "an alternative funding source and that is how most banks will continue to treat it," she said.

Mr. Suozzo suggested that a fresh round of securitization activity could be sparked by banks looking for a way to avoid increasing the cost of their deposits as interest rates rise.

"If it is a cheaper funding source than either going into the market or raising deposit costs, maybe we will see more securitization," he said.

"If you're a regional bank looking to avoid increasing deposit costs but still wanting to grow your loan portfolio, then securitization becomes an alternative," he said, "but only one of several that are available."

Such talk is far different from 1989, when securitization was hailed as a virtual survival tool for the industry by no less than the president of the American Bankers Association, Edward E. Crutchfield Jr..

Mr. Crutchfield, then as now the chairman and chief executive of First Union Corp., Charlotte, N.C., termed securitization "the most significant financing development of the 1980's."

"The most successful commercial bankers will be those who have acquired the mind-set of the funds manager, the investment banker, or the mortgage banker," he told the annual meeting of the ABA's funds management and financial markets division.

Mr. Crutchfield named securitization as one of the four major trends he regarded as fundamentally altering the banking industry, along with deregulation, internationalization, and consolidation.

From beginnings in the mortgage sector, where it had become routine, securitization was expected to spread to many other forms of banks' assets, including home equity loans, second mortgages, auto leases, computer leases, and even small business loans.

Behind the rapid expansion, it was felt, were reduced costs of deposit insurance and lowered capital and reserve requirements.

Securitization was also touted as providing diversification for investors and easier management of interest rate risk, as well as facilitating allocation of fixed and floating-rate loans over the entire business cycle.

And it was seen as adding crucial flexibility to management of banks' balance sheets as well as enabling institutions to make some deals they would not otherwise be willing to make.

Today, securitization seems to be taken more for granted, and to have moved from broad conceptual ideas to the trenches of how things actually work.

"We're seeing more breadth in securitization, but not really the depth that some people had expected," said Mr. Mayo of Lehman Brothers.

"It's been a bit harder to implement than perceived on the surface," he said.

"The securitization of different types of loans, while there is a lot of talk about it, in reality is going to take longer than some people had expected, due to all the standardization that is required," he said.

As a result of this, Mr. Mayo said, "what we have is not really a flood of securitization, but more like a steady trickle that can best be seen on a bank-by-bank basis."

"The general direction for securitization is apparent," he surmised, "but the nitty-gritty takes time to accomplish."

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