The '80S Saga of Commercial Banking: Decade of Change Has Brought Problems, but Industry Still Seems in Good Shape

Article excerpt

BOSTON -- It is the story of commercial banking in the 1980s:

* The story of how competition has eroded profit margins in commercial lending and of how too much capacity is chasing too few quality credits.

* The story of how large corporate customers are accessing cheaper sources of funds and of how money center banks are scouting out new business.

* The story of how bankers are seeking credit enhancement features and of the search for improved credit evaluation systems.

* The story of narrow spreads that are getting narrower and of fees that are getting sliced.

These are some of the messages conveyed to the more than 1,000 bankers attending the convention of Robert Morris Associates -- the trade association for commercial lenders -- this week in Boston.

Lowell Bryan, a director of McKinsey & Co. in New York, said making money these days in banking is getting more difficult.

"Large money center banks can't earn any money on their large corporate customers," he said. Commitment fees are being negotiated at twelfths and tenths against revolving credit agreements, and, he added, loans are being priced at interbank rates with spreads of more than one-half of a percent, three-eighths of a percent, and even more than a quarter of a percent.

Meanwhile the quality of the loans being booked has deteriorated. For the industry as a whole, net chargeoffs as a percentage of reserves is about 50% to 60%, Mr. Bryan said. Return on equity is another sign of the deterioration, with levels standing at about 14% before taxes, 10% after taxes, and that is including fees from nonoperating items such as sales of buildings, he added.

Despite all of these problems, Mr. Bryan said that "commercial banking is in remarkably good shape." He pointed out, however, that "thrift institutions are in far worse shape."

Mr. Bryan said that the tangible net worth for the nation's thrifts is less than 1% of assets and that 45% of the industry's assets are in institutions that have less than 3% capital. Additionally, he said that the thrifts have no real credit skills or experience in commercial lending.

One move by commercial bankers has been to develop securitized credits that enhance assets and give the banker more flexibility. Such securitized credits include municipal bonds, lease receivables, commercial mortgages, and government-issued mortgages. This system is fairly new, and Mr. Bryan said it may or may not succeed.

But the bottom line is to provide commercial lenders with really good credit skills. Otherwise, even credit risk enhancers will not work, he said.

"Commercial bankers need to get better at credit," he said, although he added that they are already better at it than thrifts, investment bankers, and insurance companies. …