Household Finance Is Rolling the Dice with Strategy to Court Inner Cities

Article excerpt

CHICAGO - When Household Finance Corp. opened its first bilingual branch in a Hispanic neighborhood on the city's north side in June, it was a homecoming for the consumer finance company.

Stung by commercial loan losses and high delinquency rates in the 1980s, Household Finance withdrew from most urban markets five years ago. It shut hundreds of expensive-to-maintain inner-city branches in places like Chicago, New York, and Detroit.

But the unit of Household International, the nation's No. 1 consumer finance company with $32.4 billion in assets, is making a cautious but determined march back into urban areas.

Big Opportunity Seen

In contrast to some banks, whose expansion plans call for avoiding cities and targeting acquisitions that enrich their share of suburban deposits, Household sees gold in the nation's asphalt jungle.

"There's a huge opportunity in going back into the inner city," said Robert F. Elliott, group executive and head of the U.S. consumer finance group.

Household Finance, which started making personal loans in 1878, has 500 offices, mostly in suburbs and small towns across 35 states.

But in the last five months it has opened four bilingual offices in places like San Antonio and Sante Fe, N.M., targeting Spanish-speaking people who are hew to the United States and have no banking relationships or credit history.

A fifth bilingual office - in East Los Angeles - opens this month. Household is adding a second office near the riot-torn South Central district, aimed at African-Americans. The company plans to open more such offices in New York, Chicago and Miami next year.

Competition Heats Up

For bankers who continue to target customers in urban areas, Household's reentry means more competition.

"We have overlapping customer bases," says John Russell, executive vice president at Banc One Corp. Like Household, the Ohio-based bank "looks at the inner city as a business opportunity," he said.

Household faces the same problems as banks in operating branches in the inner city, where real estate, labor, and security are expensive. What's more, catering to lower-income consumers - particularly those with little or no credit history - risks higher future delinquencies.

But Mr. Elliott, a 30-year veteran of Household, is willing to take the gamble out of both necessity and conceit.

Household is emerging from a two-year dark period, when delinquencies were at an all-time high, problem realty loans stacked up, and layoffs and branch closings followed.

Lax Underwriting

The problems stemmed from poor underwriting standards and diversification into commercial real estate lending during the last decade. By 1991, net income had slid to $149.8 million, versus $246.7 million in 1988. Return on equity dipped to 8.1% in 1991 from nearly three times that level in 1988.

Profits at Household's banking and finance segment, which contributes 80% of the company's total earnings, suffered. The unit, which includes Household Finance, a federal savings bank, a mortgage company, and a credit card unit, dropped 30% last year to $201 million compared with 1991.

The company started cleaning house. By the end of 1991, it had shut more than 600 offices and slashed some 900 jobs. Real estate problems linger, but the company is on the mend after returning to what it knows best: providing high-interest loans to people who can't get bank loans.

Tougher Standards

"They've made a tremendous amount of progress by changing their underwriting standards," said Gary Gordon, an analyst at PaineWebber Inc. "Delinquent loans are now starting to bottom out, and chargeoffs finally started to decline this year. …