The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
FRBSF WEEKLY LETTER October 26, 1990 Banking Performance Concern over deteriorating asset quality, especially real estate-backed assets, has dominated the news about the banking industry recently. As nonperforming loans have risen and industry-wide earnings have fallen, several major banks have announced massive reductions in staff and increased reserves against future losses. Reflecting investors' concerns, bank stock prices have fallen dramatically. In percentage terms, Salomon Brothers' 35-bank index has fallen about three times faster than the broader S&P 500. Moreover, a recent survey by the American Banker revealed that 35 percent of the public considers the banking system "unhealthy:' the poorest rating since the survey began in 1984. In this Letter some of the concerns about the banking industry are explored. Western banks are faced with many of the same problems as banks elsewhere. However, with the exception of Arizona, their performance has been strong, and most indicators of asset quality remain favorable. Even so, stock prices of major western banks have fallen along with the stock prices of the rest of the industry. A long list The list of worries facing bankers in 1990 is a long one. Currently at the head of the list is the continued deterioration of the real estate market, especially for commercial properties and for construction and land development projects. Problems in real estate markets have been particularly acute in New England, Texas, and Arizona, where even housing prices have fallen. As a result of weakening real estate markets, the banking industry is reporting a rise in past due and nonperforming real estate loans, from an average of about five percent of the total over the prior five years to over six percent currently. Loans "charged off" as uncollectible also have WESTERn BAnKinG risen, to 0.7 percent for thefirsthalf, nearly double the average for the prior five years. Not only is the quality of real estate assets a concern, but the quantity has become a concern as well, as real estate loans outstanding have doubled since 1984, and the share of real estate loans in bank portfolios has increased dramatically. The increase in banks' exposure to real estate loans partly reflects a decline in their role as commercial lenders. Business loans outstanding have grown only 20 percent in the last five years, as major corporate customers have reduced their borrowing from banks in favor of raising funds directly in the commercial paper and long-term debt markets. In addition, intense competition from foreign banks has tended to curtail U.S. banks' role in commercial lending. Another concern is the course of the economy and its impact on the quality of business loans. Banks now hold relatively fewer commercial credits of top-rated, lower-risk, corporate borrowers and more loans to both middle market and highly leveraged borrowers that are more likely to be sensitive to cyclical downturns. Should the economy slow appreciably and firms experience cash flow problems, commercial loan quality could deteriorate significantly. Many money center banks are also concerned about their still-sizeable exposure to less developed country (LDC) loans, especially if the situation in the Middle East begins to have an adverse impact on non oil-producing LDCs. Finally, with personal bankruptcies at a record level, and consumer loan charge offs up slightly, consumer loan quality is another concern. Industry performance The performance of the banking industry in the first half of 1990 reflected these problems. Bank earnings were 18 percent lower than in the first half of 1989, and the return on assets (ROA) fell Western Banking is a quarterly review of banking developments in the Twelfth Federal Reserve District. It is published in the Weekly Letter on the fourth Friday of January, April, July, and October. FRBSF from 0.90 to 0.70. (Although ROA slipped, 0.70 still exceeds the industry average for the prior decade.) This decline also suggests that although banks have attempted to reduce staff, these cost savings have not been fully realized yet. At the same time, higher overhead expenses associated with monitoring problem loans actually have raised overhead costs. In addition to higher overhead expenses, banks' net interest margin (NIM), which measures the difference between the return banks receive on their assets and the cost of funding those assets, declined several basis points to 3.42 percent. This reflected a shift to relatively more expensive time deposits for funding. Sluggish asset growth also tended to constrain income growth this year. Faced with the need to raise additional capital and improve asset quality, banks were forced to curtail lending; in the first half of this year, assets grew less than 11;2 percent, about half of the growth rate in 1989. The West: better Through the first half, bank performance in the West contrasted sharply with the deterioration seen elsewhere in the nation. Earnings at western banks increased 16 percent over the first half of 1989 and ROA rose to 1.19 from 0.91 percent. Performance throughout the region was favorable, as first half earnings rose in all the western states except Arizona. Even in Arizona improvement was notable; losses were down substantially. Continued growth in the western economy, which spurred loan growth and kept asset quality at a high level, largely accounts for the favorable earnings picture. Unlike the experience nationally, western banks' assets have expanded rapidly in recent months. Even ignoring the $5 billion in assets gained through acquisitions of S&Ls, western banks' assets grew by over $18 billion, or at an eight percent annual rate. Much of this growth was real-estate related. In fact, even though real estate markets in the West began to cool off at the end of last year, western banks' real estate lending continued to grow rapidly during the first half and into the third quarter of this year. Real estate loans increased at annual rates of 22 and 28 percent for the region and California, respectively. Residential mortgages and home equity lines of credit rose even faster than did total real estate loans, al- though some of the increase also reflects funding for commercial projects already in the pipeline before the slowdown. On account of this rapid growth, western banks' real estate loans now amount to over 43 percent of total loans, well above the nationwide average of 37 percent. California has an even higher share, at 46 percent. Such a large concentration of real estate loans is a source of concern. Fortunately, however, the types of real estate loans held by banks in California and the West are not as risky as those held by banks in regions that are experiencing difficulties. California banks hold more than half of their real estate loans in relatively low-risk residential loans. This is well above the national average. At the same time, California banks hold only about a 23 percent share of commercial real estate loans, compared to over 29 percent nationally and 30 to 40 percent in Texas and New England, where overbuilt commercial real estate markets have been a cause of significant deterioration in real estate loan quality. And although California banks hold a higher share of construction and land development loans than is the case nationally, the California economy and the West in general are much less dependent on the construction industry than is true of the regions where risky construction loans have exhibited poor performance. Finally, in the West, the most recent data provide no indication that the quality of either commercial or real estate loans has begun to deteriorate. On the contrary, the ratio of net charge-offs to total loans and leases has fallen slightly for large western banks' real estate and commercial loans. Likewise, the ratios of past due real estate and commercial loans to total loans have fallen. Investor concerns In spite of such a strong performance, the stock prices of western banks have fallen sharply along with those of banks elsewhere. Nervous investors apparently have down played the favorable performance of the industry in this region, and have concentrated on the potential spread of asset quality deterioration and uncertainty about the extent of further slowing in the economy. Thus, although most western banks have weathered the slowdown in the economy better than the industry in general, they are not exempt from industryand economy-wide concerns. Gary C. Zimmerman Economist REGIONAL BANK DATA JUNE 30, 1990 (Not Seasonally Adjusted, Preliminary Data) DISTRICT ALASKA ARIZ. CALIF. HAWAII IDAHO NEVADA OREGON UTAH WASH. -------- -------- -------- -------- ------- ASSETS TOTAL FOREIGN DOMESTIC 487,539 41,152 446,387 4,312 0 4,312 30,329 N/A 30,329 338,145 38,464 299,681 16,947 2,256 14,691 8,336 N/A 8,336 14,961 N/A 14,961 23,060 N/A 23,060 11,528 71 11,457 39,919 361 39,558 LOANS TOTAL FOREIGN DOMESTIC REAL ESTATE COMMERCIAL CONSUMER AGRICULTURE INTERNATIONAL 348,m 33,140 315,637 150,506 77,038 57,766 5,678 378 1,922 N/A 1,922 755 695 282 5 N/A 19,911 N/A 19,911 7,074 3,784 5,173 458 12 248,369 31,980 216,389 114,463 51,919 31,536 2,829 359 9,641 1,034 8,607 4,143 2,559 1,313 "43 5,601 N/A 5,601 1,506 1,453 1,549 677 N/A 11,215 N/A 11,215 2,275 1,669 6,821 21 N/A 15,746 N/A 15,746 4,991 5,556 3,293 405 6 7,489 N/A 7,489 2,970 1,787 2,041 136 N/A 28,883 127 28,757 12,330 7,617 5,759 1,104 0 43,238 13,056 18,437 11,745 1,754 1,090 255 409 3,911 1,320 1,510 1,080 21,226 5,927 10,051 5,248 3,388 1,001 1,540 847 1,630 464 686 480 1,869 672 499 698 3,712 903 1,605 1,204 2,078 517 1,052 509 3,669 1,162 1,238 1,269 457,195 416,043 385,828 35,249 350,578 3,850 3,849 3,317 3,317 28,325 28,325 26,002 N/A 26,002 317,892 279,428 267,449 32,700 234,749 15,975 13,719 15,143 2,109 13,034 7,789 7,789 6,559 N/A 6,559 13,912 13,912 8,315 N/A 8,315 21,470 21,470 17,776 N/A 17,776 10,739 10,668 9,169 71 9,098 37,243 36,882 32,097 369 31,728 81,531 269,047 32,602 65,926 31,774 78,535 59,766 979 2,338 233 408 357 697 626 4,750 21,252 2,269 4,768 1,311 10,196 2,692 58,281 176,468 20,760 45,053 22,449 44,021 43,892 2,335 10,699 1,258 2,107 1,419 1,781 4,132 1,077 5,482 746 1,040 383 2,629 666 2,096 6,219 870 1,784 858 1,239 1,468 3,407 14,369 2,246 3,206 1,412 5,585 1,910 1,722 7,377 1,075 1,484 812 3,065 938 6,885 24,844 3,145 6,074 48,636 30,344 7,584 199,592 61,469 487 463 41 561 42 1,729 2,004 693 9,902 525 32,093 20,253 5,642 151,402 59,762 388 973 146 7,080 54 1,147 547 90 2,102 38 4,810 1,049 205 2,168 187 3,055 1,590 218 3,521 2,676 397 1,407 789 146 2,874 64 15,730 401 LOAN LOSS RESERVE (ALL BANKS) NET CHARGEOFFS, TOTAL REAL ESTATE COMMERCIAL CONSUMER AGRICULTURE 2.17 1.14 0.22 0.54 1.98 -.42 2.14 0.47 0.79 0.09 0.42 N/A 3.48 1.74 1.35 3.74 2.18 -.02 2.27 1.20 0.12 0.43 1.86 -1.2 1.51 0.03 -.01 -.09 0.38 -.03 1.60 0.20 0.06 0.19 0.55 -.15 1.83 3.06 0.41 1.18 4.46 -.02 1.38 0.53 0.27 0.47 1.18 0.52 1.95 0.80 0.52 1.07 1.25 0.42 1.40 0.49 0.46 0.18 0.95 1.14 PAST DUE & NON-ACCRUAL, TOTAL REAL ESTATE COMMERCIAL CONSUMER AGRICULTURE 4.14 3.68 5.02 3.12 6.74 5.56 8.15 5.53 1.80 43.2 8.73 15.5 12.6 2.19 14.4 4.09 3.03 5.42 2.80 7.65 0.93 0.71 0.68 1.96 5.02 1.66 1.81 1.77 1.51 2.62 6.15 3.57 3.44 7.87 0.81 2.34 3.02 2.16 1.47 4.88 3.71 4.99 4.18 2.32 1.90 3.04 4.02 2.61 1.81 3.98 SECURITIES TOTAL U.S. T.S. SECONDARY MARKET OTHER SEC. LIABILITIES TOTAL DOMESTIC TOTAL DEPOSITS FOREIGN DOMESTIC DEMAND TIME AND SAVINGS NOW MMDA SAVINGS SMALL TIME LARGE TIME OTHER BORROWINGS EQUITY CAPITAL LOAN LOSS RESERVE LOAN COMMITMENTS LOANS SOLD ° ° 7,m 2,m 9,321 3,442 404 INCOME TOTAL INTEREST FEES & CHARGES 27,074 22,448 1,168 222 190 10 1,478 1,217 78 18,830 15,460 802 819 729 18 433 385 21 1,319 1,101 28 1,201 1,038 68 615 542 32 2,157 1,785 111 EXPENSES TOTAL 22,957 INTEREST 12,435 SALARIES 4,253 LOAN LOSS PROVISION 1,466 OTHER 4,803 181 98 41 4 37 1,507 702 301 167 337 15,833 8,652 2,986 936 3,260 675 425 127 12 111 364 221 57 6 80 1,060 492 97 180 292 996 570 194 50 182 541 307 84 32 118 1,800 967 367 4,096 1,417 2,816 41 10 31 -29 -12 -17 2,979 1,083 2,026 144 51 93 69 22 48 258 90 169 205 62 143 72 21 51 356 90 272 1.19 18.6 4.24 1.47 13.5 4.31 -.12 -1.7 3.72 1.23 20 4.15 1.13 19.1 3.72 1.18 17.5 4.06 2.11 32.2 7.62 1.28 17.9 4.19 0.90 13 4.15 1.42 20.4 4.27 INCOME BEFORE TAXES TAXES NET INCOME ROA GO ROE (X) NET INTEREST MARGIN (X) 79 387 Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, or of the Board of Governors of the Federal Reserve System. Editorial comments may be addressed to the editor (Barbara Bennett) or to the author.... Free copies of Federal Reserve publications can be obtained from the Public Information Department, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 974·2246. OUf76 \I) 'OJSpUI?J:I UI?S WLL xog 'O'd O)SI)UOJ:J UOS JO ~uo8 aAJaSa~ IOJapa:J ~uew~Jodea l.pJOeSe~ DEPOSITORY INSTITUTIONS REQUIRED TO HOLD RESERVES WITH THE FEDERAL RESERVE ON A WEEKLY BASIS PERCENT OF COHBINED HARKET TOTAL FOR AUGUST 1990, BY REGION DISTRICT ALASKA ARIZONA CALIF HAWAII DEPOSIT TYPE CB SL CU CB SL CU CB SL CU CB SL CU TOTAL DEPOSITS DEMAND NOW SAVINGS HHDA SHALL TIHE LARGE TIHE 5046 92 4 63 30 48 34 6731 31 66 43 55 74 6925 92 2 81 10 54 16 85 14 58 39 71 26 44 92 58 48 62 23 38 5 4 7 18 2 3 2 422 99 0 1 60 35 90 76 94 5 35 3 62 8 2 815 3 3 5 5 9 30 1 3 3 4 4 4 52 36 6 39 13 36 2 74 3 60 2 CB SL CU 67 92 71 47 81 41 82 28 5 4 4 26 3 35 18 19 0 56 3 16 2 IDAHO OREGON NEVADA UTAH WASH CB SL CU CB SL CU CB SL CU CB SL CU CB SL CU 8710 92 1 88 9 76 12 94 6 84 14 86 11 3 7 7028 3 79 15 6 701910 82 16 2 47 51 2 7030 0 71 23 6 95 1 4 7914 7 55 26 19 84 13 4 5739 5 83 13 4 781012 92 3 5 83 5 12 57 637 83 710 741610 81 12 7 5636 92 5 64 24 45 21 6929 43 52 5050 12 0 2 4 3 99 1 0 7 3 12 34 2 4 1 CB = COMHERCIAL BANKS; SL = SAVINGS & LOANS AND SAVINGS BANKS; CU = CREDIT UNIONS; HAY NOT SUH TO 10llX DUE TO ROllNDING TYPE OF ACCOUNT DR LOAN DATE ARIZ CALIF HAWAII IDAHO OREGON UTAH WASH HONEY HARKET DEPDSIT ACCOUNTS JUN90 JUL90 AUG90 6.31 6.28 6.23 6.24 6.22 6.18 5.85 5.82 5.76 6.47 6.43 6.30 5.69 5.69 5.69 6.04 6.03 5.95 6.56 6.49 6.53 6.10 6.33 6.34 6.39 6.32 6.32 92 TO 182 DAYS CERTIFICATES JUN90 JUL90 AUG90 7.81 7.73 7.64 7.40 7.34 7.25 7.33 7.30 7.13 7.77 7.76 7.58 6.66 6.79 6.79 7.61 7.50 7.48 7.37 7.32 7.29 7.71 7.67 7.51 7.16 7.22 7.25 2-1/2 YEARS AND OVER CERTIFICATES JUN90 JUL90 AUG90 8.00 7.94 7.89 7.85 7.75 7.62 7.55 7.52 7.39 7.95 7.88 7.74 8.00 7.81 7.77 8.01 7.96 7.93 7.95 7.93 7.64 8.06 8.05 7.88 7.72 7.69 7.71 9.72 49 10.72 42 10.95 7 10.24 166 11.18 27 9.93 6 10.09 73 10.90 27 10.54 5 10.30 264 11.39 21 9.64 7 10.43 90 11.28 26 9.88 N/A 11.92 105 NIA N/A 11.36 11 10.05 170 N/A N/A 10.64 5 10.42 167 12.15 38 12.39 6 10.01 159 9.25 62 11.13 6 11.89 15.46 18.18 12.45 15.92 18.60 13.25 16.75 18.00 13.09 19.79 19.44 NIA NIA NIA 13.00 13.50 N/A 11.40 12.47 19.24 11.83 15.97 20.18 12.12 14.60 16.97 US DISTRICT ----------------------------------------------------------------- ... ------------------------------------------------------------- COMMERCIAL, SHORT- TERM* COMHERCIAL, LDNG-TERM* LOANS TO FARHERS* CONSUHER, AUTOHOBILE CONSUHER, PERSONAL CONSUHER, CREDIT CARDS AVE. AVE. AVE. AVE. AVE. AVE. RATE HAT. (DAYS RATE HAT. (HONTHS) RATE HAT. (HONTH) AVE. RATE AVE. RATE AVE. RATE ---------------------------------------------------------------------------------------------------------------------------..,--SOURCES: SURVEY OF TERHS OF BANK LENDING AND TERHS OF CONSUHER CREDIT; HOST COHMON INTEREST RATES ON SELECTED ACCOUNTS. CONPOUNDED ANNUAL RATES. * DATA ARE
@FedFRASER