Magazine article Journal of Commercial Lending

Staying Focused with the Five PS of Credit

Magazine article Journal of Commercial Lending

Staying Focused with the Five PS of Credit

Article excerpt

In September 1991, Robert Morris Associates initiated a campaign for the banking industry called Focusing on Fundamentals to help bankers deal more effectively with high levels of loan losses and nonperforming assets. The thrust of the campaign is to encourage a refocusing on the basics of credit.

Today, the industry is showing good progress in returning loan portfolios to desired levels of quality. Nonperforming assets as a percent of total assets steadily improved in 1992 and 1993. Similarly, net charge-offs are declining from the high levels of the past several years. However, both nonperforming assets and net charge-offs remain at historically high, and still unacceptable, levels.

As asset quality has improved, earnings have also rebounded. The major catalyst to this bottom-line progress has been record net interest margins. Considering this, it is important to recognize that there is still much more to do to improve asset quality.

Going Forward

We are all looking forward to a better economy. However, comments by the press and our elected representatives in Washington suggest a credit crunch in the banking industry is a deterrent to economic progress. At the same time, our industry is experiencing soft loan demand in all sectors except residential mortgages. Retail and commercial borrowers appear to be reluctant to borrow in periods of economic uncertainty.

Of course, this is not uncommon at this stage of an economic cycle, but it has left many banks with historically low utilization of commitments. In addition, economists and financial experts in the banking industry indicate that the record net interest margins recently enjoyed are likely to decline.

In the short term, the industry is experiencing pressures that could conflict with the long-term goal of reducing problem loans. The result of these pressures will be the expansion of our appetite for loans. To sustain earnings in the face of declining margins, more credit needs to be extended, as loans will continue to be the major source of income. The expansion of credit will be supported by the government, as loans provide the capital to support growth.

If you believe this scenario is likely and if you wish to sustain or improve asset quality to acceptable levels consistent with protecting earnings, then it is important for you and your bank to be disciplined and to stay focused on the fundamentals of bank credit. …

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