Loan Quality Dips Among Big Banks, Small Lenders OK
Taking Stock of Corporate Troubles
By CONOR DOUGHERTY
Staff Reporter
For the second year in a row, loan quality among California banks has declined as participation in nationwide lending syndicates comes back to bite some of the state’s larger banks.
At smaller banks, which confined themselves to more conservative lending policies, the number of delinquent loans actually declined.
“In general, larger institutions are seeing a more noticeable deterioration in asset quality,” said Judy Plock, a senior financial analyst with the Federal Deposit Insurance Corp. in San Francisco.
Last June, the Business Journal reported that the ratio of non-current loans (at least 30 days past due) had hit its highest level statewide since year-end 1996. A year later, the numbers have risen even further, to 1.12 percent of all loans outstanding at March 31, from 1.07 percent in March 2001.
For those bigger players, the temptation to go national turned out to be folly. Large institutions teamed up with other banks on syndicated mega-loans, but some of these have gone belly up.
“You read the stories on how larger businesses are doing, so goes the quality of the credit for syndicated loans,” Plock said.
Despite the statewide increase in bad loans, banks have continued to lend and, in most cases, remain profitable. Through their exposure to syndicated loans, large banks absorbed the impact of corporate meltdowns, while small banks have chugged along in the middle market.
“I would say we’re doing business like we normally would,” said Dominic Ng, chairman and chief executive of East West Bancorp.
Still some worries
While lending standards have tightened, banking examiners and consultants continue to fret.
“With many people taking the equity out of their homes, and the boom in sub-prime lending, the question is what will happened if there is prolonged unemployment,” said Ashwin Adarkar, a principal with McKinsey & Co. in Los Angeles.
The Office of the Comptroller of the Currency expects credit risk to heighten in the next year because most problem loans were booked in the late 1990s when banks were competing for a chance to throw money at new customers. “You still have loans on the books that were written with looser underwriting standards,” said Barbara Grunkemeyer, a national bank examiner for the OCC.
At California banks with over $1 billion in assets, the past-due and non-accrual rate rose to 1.93 percent of total loans for banks with $1 billion or more in assets, up from 1.77 percent a year earlier. Past-due loans are at least 30 days late. Non-accrual loans are loans that are 90 days late.
For banks with less than $1 billion in assets, however, the median past-due and non-accrual rate fell to 0.9 percent in the first quarter, down from 1.32 percent a year earlier. “Local banks make lots of little loans, so they’re not exposed to any one borrower,” said Richard Eckert, financial services analyst for Wedbush Morgan Securities in Los Angeles. “Whereas the money-center banks have large capital market exposure.”
In Los Angeles, the smaller players are growing and becoming more profitable by lending to smaller businesses and homebuyers.
But even here, there have been some miscues. GBC Bancorp lent $27 million through a J.P. Morgan-led syndicate to a metals trading company that turned out to be fraudulent. The L.A.-based bank is cutting its exposure to syndicated deals.
Generally, though, provisions for loan losses have come down, indicating that banks have worked out many problem loans. Bankers now appear to be taking a more controlled approach to lending, shying away from the types of loans that have caused trouble.
Pull-back from syndicates
According to a recent study by the Office of the Comptroller of the Currency, the nation’s largest banks pulled back on national loans and on commercial real estate projects, but they’ve maintained consistent standards in most other areas.
The study of bank underwriting practices reported that 67 percent of the banks participating in the survey tightened commercial underwriting standards last year.
A year ago, 55 percent of banks surveyed for the same study said they had tightened. “Though banks have tightened commercial underwriting standards in response to the current conditions, examiners also reported that the majority of surveyed banks expanded their loan portfolios and plan to do so in the upcoming year,” the survey said.
The Comptroller’s report, which covered the 12 months ended March 31, found most of the tightening occurred for structured finance and syndicated loans. Other commercial products went largely unchanged, with a slight bias toward tightening. Examiners reported standards for commercial loan products tightened the most.
Compared with the last bout of economic softness in 1991, when the nationwide non-performing loan rate peaked at almost 4 percent, local institutions have stayed remarkably healthy, and continued to lend.
“I have seen slight deterioration in my own portfolio,” said James Dean, senior vice president and market executive for greater Los Angeles commercial banking at Bank of America Corp. “But that doesn’t mean you don’t go looking for new business.”
For the year ended March 31, assets at commercial banks in California grew 7.3 percent, to $262.7 billion statewide, as middle-market commercial and small business customers took on new debt; the home lending market has also been a boost.
Still, multiples for cash-flow loans have come down to about two-and-a-half times operating cash-flow, down from four times in the late ’90s. Asset-based lending, on the other hand, has thrived. “When one has collateral, there is a lot of comfort in that,” Dean said.
Aside from a few spectacular flops, companies are generally keeping current on their debts. But it’s the unpredictability of corporate scandals and the stock market that are giving forecasters reason to predict further problems on large commercial loans.
“Certainly we’ve seen a large fallout in terms of corporate deals,” said Grunkemeyer. “I’m not sure when that’s going to bottom out.”
