Business: Several large banks exposed to default risk, study says

The Associated Press

RALEIGH, N.C. (January 14, 2001 5:24 p.m. EST http://www.nandotimes.com) - Three large national banks based in North Carolina are among the institutions with the most exposure to corporate loans at risk of default, according to a study by New York investment banking firm Salomon Smith Barney.

The report released Friday said Charlotte, N.C.-based Bank of America has $4.244 billion in corporate loans that could default in 2001 - more than any other bank in the country.

First Union of Charlotte comes in at No. 4 on the list of banks to watch with $1.08 billion in corporate loans that may default. Wachovia of Winston-Salem, N.C. ranks No. 8 with $382 million in troubled corporate loans.

The result could be that corporations in North Carolina could find it more difficult to access credit this year, said Tony Plath, a University of North Carolina at Charlotte finance professor.

"Any time credit quality worsens, banks tighten their belts," Plath said. "It looks like we'll have three (banks) right here who will have to do some tightening."

Other banks on the report's watch list and their ranking are: 2, Bank One; 3, J.P. Morgan Chase; 5, FleetBoston; 6, Bank of New York; 7, KeyCorp.; 9, U.S. Bancorp; 10, Comercia.

Salomon Smith's report is the product of the investment bank's financial research team and is based on interviews with bond traders, bankers and credit analysts. The team first created a list of corporate loans that may default this year, then estimated how much individual banks may be at risk to these loans.

North Carolina banks are exposed to some of the largest loans on this watch list.

Bank of America is a participant in three of the five largest syndicated loans on the list. They include loans to:

- Owens-Illinois, a Toledo, Ohio-based packaging company, for $4.5 billion,

- Finova, a financial-services company in Scottsdale, Ariz., for $4.7 billion, and

- J.C. Penney, the retail chain based in Plano, Texas, for $6 billion.

First Union is exposed to J.C. Penney and auto parts maker Federal-Mogul of Southfield, Mich., which was loaned $2.1 billion

Wachovia is exposed to Owens-Illinois and a $7 billion syndicated loan to Stamford, Conn.-based Xerox.

Bob Stickler, director of financial communications at Bank of America, said the bank's No. 1 ranking is deceptive.

Not mentioned in the report, he said, is that Bank of America is one of the most aggressive commercial lenders in the country, which means it will rack up more bad loans than more consumer-oriented banks, such as San Francisco-based Wells Fargo.

Stickler also said that the $4.244 billion in estimated troubled loans represents just 1 percent of the bank's $400 billion loan portfolio.

"Look, everything's relative to how big you are," Stickler said. "We could write off every one of those loans that (Salomon Smith) says is possibly troubled and we'd still be fine."

But Bank of America does not have as much room to maneuver as it did a year ago, Plath said. If one of its large corporate borrowers defaults, Bank of America likely will have to dip into its cash earnings to increase its loan-loss reserves, he said.

"Bad loans have a profound effect on a bank's earnings and stock price," Plath said.

Credit problems were the primary cause for the rapid climbs and drops of bank stock values in 2000, the report said.

Wachovia's stock fell 20 percent after its announcement last June that it was increasing its loan-loss reserves to cover problem corporate loans. Bank stocks slid 12 percent in October after investors panicked over bank exposure to bankruptcies connected to asbestos-related lawsuits.

There is cause for optimism, said Harry Davis, an economics professor at Appalachian State University in Boone. The Federal Reserve's decision to cut interest rates earlier this month should make it easier for corporate borrowers to pay off their debts.

Lower rates also will make it easier for banks to put more loans on their books, thus mitigating the impact of problem corporate loans, Davis said.

"So long as the lending pie keeps getting bigger, banks can handle an increase" in troubled corporate loans, Davis said. (PROFILE (CO:First Union Corp; TS:FTU; IG:BNK;) (CO:Wachovia Corp; TS:WB; IG:BNK;) (CO:Bank One Corp; TS:ONE; IG:BNK;) (CO:JP Morgan Chase & Company; TS:JPM; IG:BNK;) (CO:Keycorp; TS:KEY; IG:BNK;) (CO:United States Bancorp; TS:USB; IG:BNK;) (CO:Owens Illinois; TS:OI; IG:CTR;) (CO:Penney JC; TS:JCP; IG:RTB;) (CO:Federal Mogul Corp; TS:FMO; IG:AUP;) )

-- kevin (ktross@mailcity.com), January 15, 2001

Answers

"So long as the lending pie keeps getting bigger, banks can handle an increase" in troubled corporate loans, Davis said. ???? So I guess this means as long as corps and individuals keep borrowing more than they can repay, everything will be fine. As long as the supply of money keeps expanding and the value of money keeps decreasing we can keep the bubble in the air. Hmmmm--sounds vaguely familiar--I think something like this happened about 70 years ago or so.

-- poconojo (jberman478@aol.com), January 15, 2001.