Magazine article American Banker

Declining Loan Reserves Stir Analysts' Concern

Magazine article American Banker

Declining Loan Reserves Stir Analysts' Concern

Article excerpt

With consumer loan problems rising, the issue of how much banks should be putting aside to handle losses is likely to get special scrutiny when second- quarter earnings reports arrive in a few weeks.

Last quarter, banks tallied another fine earnings record, but many again did so by skimping on providing reserves against potential loan losses, says analyst Raphael Soifer of Brown Brothers, Harriman & Co.

Indeed, some banks have fattened their earnings for much of the past two years by drawing down reserves. Currently, the banking industry's reserves as a percentage of assets are at the lowest level since 1986, according to figures from the Federal Deposit Insurance Corp.

Mr. Soifer and others on Wall Street have growing doubts that the phenomenon can go on much longer. "The issue is how quickly provisions are going to have to rise," he said.

Bankers assert that their reserves are adequate, since asset quality remains high for business loans - the biggest reason for the reserves.

Indeed, net chargeoffs of business loans themselves fell to 0.17% of such loans last year for all banks, according to FDIC data. That contrasts with the peak of 1.63% in the problem year of 1991.

But some analysts, notably George M. Salem of Gerard Klauer Mattison & Co., warn that rising credit card delinquencies - not reflected as nonperforming loans for banks - "can allow reserves to appear stronger than they really are."

Mr. Soifer emphasized that he does not believe banks are under-reserved. Rather, he thinks they have for some time been adding too little to reserves, given asset growth, and thus have overstated earnings.

As a result, he continues to view bank stocks in general as "being relatively expensive and unlikely to outperform in the earnings-driven market environment we currently envision for the remainder of 1996. …

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