Magazine article American Banker

The Dark Side of Thrifts' New Business Lines

Magazine article American Banker

The Dark Side of Thrifts' New Business Lines

Article excerpt

NEW YORK -- Joseph A. Jolson, an analayst with Montgomery Securities in San Francisco, has some good news and some bad news for thrift investors.

First, the good news. Thrifts, through their expansion into new business lines and the use of techniques such as adjustable-rate mortgages, are on the right track for reducing their interest rate risk. And the reduction of interest rate risk should help reduce the broad fluctuations in thrift earnings that come with large swings in short-term rates.

(Analysts agree, however, that thrifts still have a way to go before they will be able to post consistent earnings in a variety of interest rate environments.)

Now the bad news. As a function of reducing interest rate risk, thrifts could be taking on a new kind of problem: business risk.

The principal business risk they will increasingly face comes in the form of loan losses, especially in lending areas that are new to thrifts. The way a savings and loan or a savings bank manages this risk will probably become a major issue to investors in the near future, Mr. Jolson believes.

He estimates that, in the future, 75% of the incremental loan losses to be experienced by thrifts will be "attributable to diversification into nontraditional areas." The actual level of an individual thrift's reserves, he says, should reflect the firm's involvement in newer, riskier businesses.

Current loan-loss reserves average about 0.15% of earning assets at thrifts, compared with 0. …

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