Business | Banking
Investors less caring about rise in bad loans at US banks
Many US banks may find themselves stuck with more borrowers unable to pay their bills. Shareholders may not care.
- Reuters
- Published: 00:00 January 14, 2007
New York: Many US banks may find themselves stuck with more borrowers unable to pay their bills. Shareholders may not care.
Since August, large banks including Fifth Third Bancorp Inc, National City Corp, SunTrust Banks Inc and Zions Bancorp have disclosed one-time problems in which one or a small number of loans ran into trouble.
Investors reacted badly to the problems at Fifth Third and SunTrust but didn't seem fazed by those at National City's and Zions'.
Analysts expect to learn of more loan delinquencies and defaults starting from Tuesday, as most big banks report fourth-quarter results and discuss their outlooks for 2007.
Yet they said investors may ignore the magnitude of some losses and focus instead on longer-term credit trends.
"Where you would start to see concern is if, for example, a bank charges off a bunch of medium-sized loans rather than one or two," said Peter Kovalski, who helps invest more than $4 billion at Alpine Woods Investments in Purchase, New York.
"The dollar amount is important, but a larger number of bad loans might suggest a ripple effect in consumer or small business lending," Kovalski added.
Unusually good loan quality helped banks boost profit from 2004 to 2006, even as 17 Federal Reserve interest rate increases cut into lending margins.
Fed data show that charge-off rates averaged about 0.42 per cent of total loans from January to September, the lowest percentage since 1994.
Many banks, including Citigroup Inc, Bank of America Corp and Washington Mutual Inc, have projected some credit deterioration in 2007. This could force some banks to set aside more reserves, cutting into profits.
"We have passed the inflection point on credit quality," said Thane Bublitz, an analyst at Thrivent Financial for Lutherans in Appleton, Wisconsin, which invests $65 billion.
Banks may set aside 35 per cent to 40 per cent more this year for loan losses, according to Gary Townsend, an analyst at Friedman Billings Ramsey & Co. in Arlington, Virginia.
Yet he said the credit situation may prove healthier than expected, especially if accelerating growth in gross domestic product helped boost corporate profits and lower loan losses, and if unemployment stayed low.
"Consumer losses come primarily from job losses, and if we aren't seeing those, banks engaging in prime types of credit may well do better than expected," he said.
Zions, based in Salt Lake City, said on Thursday that quarterly profit per share may fall nine per cent below analysts' average forecast, in part from a six cents per share loss on a lease related to an alleged accounting fraud at a water bottler.
Zions shares fell just 0.7 per cent on the news. "Zions has a history of managing credit risk well, and that could have entered into the market's reaction," Bublitz said.
On October 17, Cleveland's National City said it suffered $10 million of fraud-related mortgage losses, and $48 million of construction loans were at risk because of a developer's bankruptcy. Its shares rose 0.7 per cent that day.
Investors have been less forgiving of other banks. Shares of Fifth Third fell 1.5 per cent on November 21 after the Cincinnati bank, which had had several financial setbacks in the prior two years, said it wrote off two commercial loans worth $11 million.
And SunTrust fell 3.8 per cent on August 14 after the Atlanta bank said it might have to write off a $200 million loan, an amount equal to roughly one-tenth of annual profit.
While some banks have eased lending criteria, credit standards had stabilised by autumn, an October survey by the Fed shows.
Some, nevertheless, still worry. "Personally, I think the writing is on the wall," said Steve Scruggs at Bragg Financial Advisors Inc in Charlotte, North Carolina. "There's a price for banks to pay for easier money."
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