Risk management has become a "virtuous profession" in banking, but credit standards have deteriorated badly, L.M. "Bud" Baker told bankers Monday.
Mr. Baker, chairman and chief executive of Winston-Salem, N.C.-based Wachovia Corp., spoke at the annual Robert Morris Associates conference for lenders and credit risk managers.
His remarks highlighted a day of speeches-by economists who predicted storms for lenders, and by bankers who called upon their peers to heed dark clouds in emerging markets and on Wall Street. "The popular notion that risk management in banking is not as important as in the past, and that reserves and capital are superfluous, is foolish," Mr. Baker told attendees.
Mr. Baker said risk management has become one of a dozen key areas in banking that will determine success. The others include expanding key lines of business, controlling expenses, deploying capital and technology, and helping people develop their skills, he said.
He urged banks to do a better job when pricing loans, adding that today many banks are "not being paid for the credit risk they are taking."
Wachovia is considered among the most conservative in the business. And Mr. Baker's predecessor, John Medlin, attacked what he viewed as lax standards in the industry.
Mr. Baker acknowledged it is difficult to appease shareholders and banking analysts who demand ever-expanding returns. He said Wachovia has tried to tell investors that "the world isn't going to grow that fast," so they can expect the bank's earnings to rise 8% to 10% a year.
Indeed, Mr. Banker railed against some of the businesses many banks have relied on to boost their earnings. To those that have entered the subprime lending business, he offered the following observation: "A subprime borrower is someone who can't repay your loan."
And to those that have begun to underwrite high-yield bonds, he said, "I'm sorry, I still call them junk bonds."
Mr. Baker predicted that as the economy slows, some industries that banks lend to will be hit particularly hard. Banks need to identify those industries and then weed out their marginal players as the economy turns, he said.
For example, new companies trying to compete with established players may find it tough going. "If you're a marginal distributor" facing established competition, he said, "you've failed."
Businesses and banks, he said, "must adjust to a new lower-growth environment." In the economy that lies ahead "real growth" will be 2%, inflation will be zero to 1%.
In opening the conference, Lee B. Murphey, chairman of Philadelphia- based Robert Morris, predicted credit standards will "get tougher over the course of the next year or two" and called on banks to prepare its newest credit officers for a rising number of defaults.
Priscilla Turnbull, an executive vice president with WEFA, a Eddystone, Pa.-based consulting firm, predicted nominal growth or contraction for agriculture, mining, nondurable manufacturing, and utilities through 2000.
"Growth will slow but we will not go into a recession," Ms. Turnbull said. And when it comes to lending, "it's tough to get away from risks at this particular moment in time."