Banks under Microscope for Signs of Infection from Health-Care Loans

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Investors are scouring banks' fourth-quarter earnings reports for health-care-related loan chargeoffs, trying to decide if the long-troubled sector has finally bottomed out.

"Health care is a problem, and it is going to get worse," said Jim Nelson, director of lending and finance at Robert Morris Associates, the trade group for lenders and credit risk managers. "There is some time period -- it might be six months from now, it might be 12 months -- after which loans to the health-care industry are going to start going bad at a faster pace."

Several banking companies have taken steps to calm investors.

SunTrust Banks Inc. of Atlanta told analysts Jan. 12 that it had "scrubbed" its portfolio of health-care loans in the fourth quarter, writing off $60 million in bad debt -- particularly in the areas of long-term care and acute home care.

L. Phillip Humann, SunTrust's chairman, president, and chief executive officer, said he expects it to have few health-care chargeoffs in 2000.

Amsouth Bancorp. of Birmingham, Ala., said Jan. 18 that it had targeted 11% of its health-care portfolio -- about $149 million of loans -- for "accelerated disposition." The company cited weakness in a subsegment of the health-care sector that "consists solely of a very few long-term Medicare-dependent health-care companies."

If chargeoffs increase, it is the fault of Congress, not bankers, said Kevin M. Blakely, executive vice president of Cleveland-based KeyCorp and chairman of Robert Morris Associates.

Lenders as well as borrowers were blindsided by dramatic cuts in Medicaid reimbursements last year, he said, and as a result the health-care industry faces continued downward pressure on pricing.

"A number of providers had not anticipated the changes and had built up infrastructure that couldn't handle the change," Mr. Blakely said. "Bankers have underwritten loans to them with a certain degree of expectation."

When Medicaid reimbursement was cut, many companies with high debt-service costs found themselves with a serious cash-flow problem.

But others argue that it is simplistic to blame the industry's problems on Congress.

"These situations are being blamed on Medicare completely, which is not the full story," said William Shine, executive vice president for health care at GMAC Commercial Mortgage Co., Birmingham, Ala.

Mr. Shine said some health-care industry borrowers used unsecured debt and bank loans to make acquisitions outside their core business. …