By Moyer, Liz
American Banker , Vol. 166, No. 160
It is natural that some on Wall Street would start thinking ahead to happier times with the financial services in the grip of a messy downturn.
Count UBS Warburg among them.
While stopping well short of declaring a victory in the banking industry's battle with deteriorating credit quality, banking analysts at the company have calculated how much an improvement in commercial loan chargeoff rates would boost per-share earnings for a group of 15 top money-center and superregional banking companies.
A 50% drop in commercial loan chargeoffs next year would translate to an average 4.9% gain in per-share earnings for the 15 companies, according to the UBS Warburg study.
A few of the most embattled companies last year and this year would stand to gain much more.
For example, Bank One Corp.'s per-share earnings would climb 10.3% next year under UBS Warburg's scenario. Bank of America Corp. would have a 6.8% increase, as would FleetBoston Financial Corp.
Per-share earnings at Wachovia Corp. and U.S. Bancorp would rise 6.6%, according to the research.
The companies would benefit even from a 25% decline in commercial net chargeoffs. Per-share earnings next year would jump 5.1% at Bank One, 3.4% at Bank of America and Fleet, and 3.3% at Wachovia and U.S. Bancorp., according to the study. The average per-share earnings for the whole group would increase 2.4%, UBS Warburg says.
Diane Glossman, an analyst at UBS Warburg, said the study assumes that chargeoffs would match provisions. "Banks have been saying 'We've reserved so much.' So we decided to see how much earnings leverage there really was."
For over a year the headlines have been dominated by several large commercial credits that went bust, including loans to movie theater operators, equipment finance companies, and companies with asbestos-related problems. Banks shared these loans in several large syndicates, and when the loans went sour, some of the biggest participants in the syndicated loan market took hits to their earnings as they were forced to raise provisions and reserves.
Companies such as Bank One and Fleet also started scouring their portfolios and selling off problematic loans early.
Lately some bankers -- notably those from Bank One and Fleet -- have been saying they expect the credit quality problem to bottom out by yearend and corporate credit quality to improve starting at the beginning of next year.
Some analysts agreed that the end is in sight for the big blowups in large commercial loans, but they also said they expect middle-market loans to continue to come under pressure. …