As Economy Peaks, Some Warn: 'Look out Below.'

By Chase, Brett | American Banker, January 6, 1998 | Go to article overview

As Economy Peaks, Some Warn: 'Look out Below.'


Chase, Brett, American Banker


Banks this year may test the adage that what goes up must come down.

The notoriously cyclical banking industry has been on the upswing for a half a decade, but there are signs that the banking environment may not be as favorable in the year ahead. Among them: banks' pursuit of higher- yielding but riskier loans and the gathering financial storm in Asia.

While no one sees an out-and-out crisis looming, there is palpable anxiety that a booming economy and record industry profits have made some bankers feel invincible.

"There's a lot of very stupid stuff going on out there. It's the typical top-of-the-market stuff," said Richard M. Kovacevich, chairman of Norwest Corp., Minneapolis. Rising deal prices are just one manifestation of bankers' buoyant mood, he said. Recent merger prices have averaged 2.4 times book value, and several have topped four times book.

The nation's economy, now in the seventh year of an exhilarating run, has certainly kept bankers' spirits aloft. But many economists think growth has peaked: While inflation remains low and consumer confidence high, retail spending has softened, and ripples from the Asian financial crisis are spreading.

Economic high points have in the past proved to be dangerous moments for banks, serving as fertile ground for excesses that ballooned into serious problems later. Setbacks such as the real estate bust of 1990 and the less- developed-country debt crisis of the early 1980s seem to drag the industry back to earth every few years.

"This is the part of the cycle" when banks are "vulnerable to let credit standards slip in a way that they will have to pay for later," said James Annabele, chief economist for First Chicago NBD Corp.

Regulators have been sounding a warning about credit quality for the past year, and bankers say they are taking steps to shore up their portfolios. (See article, page 4.)

"There is a lot of competition out there and we are trying not to do anything dumb," said Malcolm T. Murray Jr., chief credit officer at First Union Corp. "It is a good time to pay attention to the basics and remind our folks that many customers look so good because we are in a period of continued economic expansion."

What's more, bankers say they have diversified their businesses enough into financial advisory and other fee-generating businesses to ride out whatever economic downturn might be ahead. Indeed, Mr. Kovacevich said a cooling economy could bring an opportunity to at last shed the boom-and- bust label that has kept bank stock prices at a discount to other industries.

Still, banks' pursuit of trendy markets-notably high-margin, high-risk subprime loans-worries some bankers. Subprime lending can be profitable with the right expertise, but some say too many banks are jumping in head first.

"We know that the industry is overcapitalized. And we know bankers have historically taken to temptation when it was hard to generate revenues, so they look for the latest hot ticket for lending," said Paul Dorfman, BankAmerica Corp.'s executive vice president in charge of credit policy and chairman of Robert Morris Associates.

Among others, Chase Manhattan Corp. last year expanded its subprime mortgage lending and securitization businesses; KeyCorp bought subprime lender Champion Mortgage; and Barnett Banks Inc. started a manufactured housing division. …

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