Banking Industry Is Bouncing Back

Article excerpt

FOR all of its problems, the United States banking industry is looking increasingly good to many investors.

The guarded optimism comes despite criticism from Washington about high interest rates on bank credit cards, unease about problem real estate loans, and concerns that some financial institutions are reluctant to make loans, even to credit-worthy borrowers. The failure of banks to issue loans is often cited as one of the key contributors to the current downturn, although it is not disputed that loan demand fell off during the recession.

Still, there are a number of reasons for a somewhat upbeat view of the banking industry. Assuming that the economy does not substantially worsen during the months ahead, the banking industry is expected to come out of the downturn in a fairly advantageous position, compared to other major US industries. Traditionally, bank stocks often rise in the period following a recession, as the pattern of lending slowly builds back up and credit costs return to a more "normal" level.

The banking industry is now in the "midst of a multi-year bull market," says Thomas Brown, a bank specialist with Donaldson, Lufkin & Jenrette Inc.

"Bank earnings were terribly depressed in 1989 and 1990," Mr. Brown says. "But earnings are now recovering and should continue to recover. If the economy were to head south {in a 'double-dip' recession}, then the earnings recovery would be delayed for the industry. But it wouldn't be aborted."

Despite the improving earnings picture for most banks, federal officials still expect some failures in the period ahead. A number of banks acknowledge that they face a rising level of problem real estate and mortgage loans, particularly along the Eastern Seaboard, where the impact of the recession has been most severe. Last week, for example, the Mortgage Bankers Association announced that residential mortgage payments late by 90 days or more grew at the fastest rate in over five years during the quarter ending Sept. 30. Real estate foreclosures during the third quarter were also up. …