Top Business Lenders Took Lumps in 1990

The amount of sour business loans held by the nation's top 100 lenders soared 26% last year, a rate of deterioration reflecting the toll that recession has taken on banks' asset quality.

Bankers were aware that business loans soured at a stunning pace last year, but this is the first time that the results have been tallied in this way.

$3.7 Billion More in Bad Loans

Noncurrent commercial and industrial loans on the books of the top 100 domestic business lenders rose to $17.8 billion at yearend 1990, from $14.1 billion a year earlier, according to American Banker (see tables starting on page 10). These loans are 90 days past due or placed on nonaccrual status.

"My hunch is most of the increase in dollar terms came from HLT-related credits," said Judah Kraushaar, a bank analyst at Merrill Lynch & Co., referring to loans classified as highly leveraged transactions. Mr. Kraushaar's view is widely shared by other experts.

The C&I category does not include real estate loans, an even bigger problem for banks.

Last year's sharp deterioration occurred as overall business lending stalled. Slack demand by borrowers combined with lenders' tighter standards kept banks from adding new loans as sick loans multiplied.

Total business loans outstanding at the top 100 banks were virtually unchanged at $393 billion, compared with $389 billion at the end of 1989.

While there's little to cheer about in the 1990 numbers, this year could wind up even worse. Business loan volume is expected to be flat at best, with problem loans continuing to rise.

Though the economy is generally believed to have bottomed out, banks do not generally see an improvement in the level of their problem loans for some time after a recovery has begun.

Analysts say it is difficult to pinpoint exactly when the level of noncurrent loans will peak.

Forecast for a Turnaround

It could happen as early as the third quarter of this year, said Allerton Smith of First Boston Corp. Then again, problem loans could keep mounting "as far out into 1992 as you would care to imagine," he added.

James McDermott, president of Keefe, Bruyette & Woods Inc., believes that while the level of noncurrent loans will continue to rise, "There will be a decelerating rate of additions of new problem loans" through 1991.

At the same time, business loan volume likely will fall this year because of slack credit demand, he added.

Ironically, banks now are in a "good position to lend," Mr. McDermott said.

Because banks have been buying government securities, rather than making many new loans, they have lots of liquidity on their balance sheets. What's more, banks have also been busy issuing new debt and equity this year, thereby boosting their capital ratios.

Business Loans Could Increase

Despite sluggish credit demand, some analysts say it's still possible that U.S. banks could end the year with more, not fewer, business loans on their books.

Among other things, analysts cite tighter conditions in the commercial paper market and a pullback by foreign banks in the United States.

Banks' portfolios of HLT loans, however, have been declining steadily for a number of quarters, and will continue to shrink.

As a result of their big exposure levels to HLTs, the big New York money-center banks all had relatively high ratios of noncurrent business loans at yearend 1990.

Bankers Trust Co., for example, had the fourth highest ratio of noncurrent business loans among the nation's top 100 business lenders.

At yearend, 10.46% of Bankers Trust's $7.1 billion of business loans were noncurrent.

Only Midlantic Bank, Connecticut Bank and Trust Co., and Bank of New England had higher ratios.

Analysts were quick to point out, though, that Bankers Trust has a relatively low concentration of loans on its balance sheet, which blunts the significance of the high ratio.

"You can't ignore the ranking, but its relevance has to be tempered by the risk to the balance sheet," observed Mr. Smith at First Boston.

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