There is a growing call on Wall Street for banks to increase disclosure about consumer loan quality.
"It's long overdue," said George M. Salem, an abalyst with Gerard Klauer Mattison & Co., New York.
"I am not saying there is a problem right now, but these loans have been growing very rapidly," he said. "The next recession is going to cough up more consumer loan problems than ever before."
Under current practices, he said, analysts learn about loan quality problems in the consumer sector only when writeoffs of poor credits are disclosed - four to six months after initial delinquencies.
"Clearly they should be disclosed," said Moshe A. Orenbuch of Sanford C. Bernstein & Co., New York. He and others urged the move last year while serving on a committee studying possible changes in bank disclosure guidelines for the Securities and Exchange Commission.
"I would say you would at least want to see the 30-day delinquencies and chargeoffs by the major type of relevant consumer loan," he said earlier this week.
So far, the federal regulatory agency has not addressed the committee's recommendations, Mr. Ohrenbuch said. The analyst thinks consumer loans are more likely to pop up as "pockets" of problems afflicting particular banks instead of an industrywide headache.
Mr. Salem said in a new report that "as things stand now, few banking companies offer detailed consumer loan delinquency data on a quarterly basis." He thinks they should provide details on how long several types of consumer loans have been delinquent. Banks could disclose the amount of loans delinquent by 30-59 days, 60-89 days, and 90 days-plus, he suggested.
"At a minimum, we'd like to see delinquencies, separately, for credit cards, home equity loans, and other revolving credit," the analyst said.
He noted that credit card loans and other types of revolving credit have been growing at large banks at rates of about 20% annualized since 1993. For some banks, such loans account for a considerable fraction of earnings.
In addition, he thinks figures on average outstandings for these categories of loans should be reported on a quarterly basis so that analysts can monitor volume growth.
And if banks really want to be helpful, they could provide data on loan yields, their cost of funds for card operations, and even the return on assets for their credit card business lines, he said.
Mr. Salem stressed that he is not in favor of piling new layers of disclosure atop existing reporting requirements for the nation's banks. In fact, he thinks that much loan-quality information from past business cycles is now dispensable and should no longer be mandatory.
"Information on commercial real estate (financing), leveraged buyouts, highly leveraged transactions, and loans to developing countries can be reduced materially," he said.
That would leave room to increase data about a possible "next war" in consumer credit instead of refighting already-won battles dating from past credit cycles.
"Let's get ahead of the curve for a change," suggested the analyst, who said he was directing his ideas toward both the banking industry and the SEC.
"Now is the time to gradually increase such disclosure, while the loan problems are still relatively benign," he urged, noting that "historically, increased disclosure has only occurred after problem loans have escalated."
Mr. Salem also pointed out that "bank stock investors have not had much experience analyzing the quality of consumer loans since most of the loan problems of the last 20 years have involved wholesale lending."
Mr. Salem said the issue of more disclosure in this area of banking brings up a key question: Are delinquent consumer loans, in fact, "nonperforming" loans?
Besides not being separately disclosed, delinquent consumer loans technically accrue interest until charged off and thus are not lumped among a bank's nonperforming loans under current industry practice, he said.
This, he maintained, can effectively make a bank's ratio of loan loss reserves to nonperforming loans "highly misleading" by overstating the coverage of bad loans.
As a result, he said, "this heavily used ratio would be useless in tracking reserve adequacy during an escalation in delinquent consumer loans."
Mr. Salem feels the disclosure of consumer loan delinquencies "should be mandatory at all times in the cycle" at banks where these loans are a material portion of total loans.
