Lenders proceeding with caution in commercial market

COMPANIES EAGER TO grow and banks hungry for bigger profits have produced a vigorous national lending market. But loan growth, and attendant losses and delinquencies, have brought rumblings of concern from some regulators and bank analysts.

While there appears to be consensus that the banking

Local bankers say they are already doing this, with the lessons of the 1980s and more recent loan losses clear in their memories. But the national trends that bother observers are even stronger in Louisiana.

Commercial and industrial (C&I) lending, which has been expanding at more than 10% a year nationally, grew from $6.65 billion at the end of 1997 to $7.72

billion at the end of 1999 in Louisiana. During the same time, seriously delinquent C&I loans, or those at least 90 days overdue, rose from 0.96% of the C&I portfolio to 1.52% in the state, according to Warren Heller, research director at the Veribanc Inc. bank analysis firm in Wakefield, Mass.

"There's this growth in C&I delinquencies nationally and (Louisiana) seems to be a particular example of it," Heller says. "At this point I worry about it ... I'm uneasy because I don't know what's behind it," he says. "We need to watch it for several quarters ... but is it telling us there's more risk in the system? Yeah."

Sean Stacy, an analyst with Weiss Ratings Inc. in Palm Beach Gardens, Fla., calls the situation of increased delinquencies amid economic expansion "disconcerting.

"Stacy, who monitors banks for the financial services safety firm, says the industry's lending standards have slackened because the economy has been so vigorous. But banks are also seeing "shrinking margins so they're looking for profit opportunities anywhere they call," he says. This drives them toward the typically riskier but more rewarding commercial lending sector.

In their most recent quarterly report, analysts with the Federal Deposit Insurance Corp. blame increased C&I loan losses and delinquency rates on global competition that has hurt corporate borrowers, banks making speculative loans to companies with lower credit ratings and a growing reliance among companies on debt to finance growth. Nationally, the FDIC reports that net losses on C&I loans were $1.8 billion ill 1999, all increase of more than 51% from 1998.

Since 1998, the FDIC's regional office, overseeing Louisiana and four other states, has made roughly twice as many bank rating downgrades as it has upgrades, indicating heightened concern for asset quality.

Bankers say all is well Some local bankers see no cause for alarm, however, and point to their own improving charge-off rates as evidence against industry-wide concerns.

"Bank credit on the commercial side for the industry in general is strong and our problems are declining," says Robert Sutton, senior vice president and state credit officer at Bank One, Louisiana, tile local scion of Chicago-based Bank One Corp.

"What I see is regulators acting like (Federal Reserve Board Chairman) Alan Greenspan when he voices concern for the (stock) market. They're saying 'Golly, it's been so good for so long. Since it can't last forever we have to think about how things will be when the economy is not so good," Sutton says.

"I think banks do that, especially in Louisiana and the Southwest where we had such a terrific depression - not even a recession, I'd say a depression - in the late 1980's. Banks remember that."

Responding to what the bank sees as greater risk in local commercial real estate, Bank One has raised the down payment required on loans for such projects as hotel development from 25% to as high as 40% over the past eight months.

Hibernia National Batik had its own taste of the bad times with the commercial sector last year after some highly publicized loans soured. Foremost among them was a $35 million piece of a syndicated loan to United Cos. Financial Corp., a sub-prime lender based in Baton Rouge that filed for bankruptcy in March 1999.

"Over the last two years the regulatory agencies have been saying (to the banking industry) your standards are loosening," says Richard Wright, chief credit Officer at Hibernia National Bank. "In mid-1998 we started agreeing with them," he says.

"Clearly, somebody is having these difficulties, otherwise these numbers (of loans on banks' watch lists) wouldn't be going up," Wright says. "But when you look at our portfolio the trends are all stable to positive ... We had enough trouble in 1999 to last us a while."

In the wake of this trouble, Hibernia changed some of its lending standards, and as a result its C&I portfolio shrank by 5% by the end of the year. Wright says the batik is trying to reduce risk here by making smaller loans to more varied customers. "That means smaller maximum commitment, even to very creditworthy chents, to increase our diversity," he says.

Wright beheves that heavy debt in the health care industry, the result of faltering efforts at market consolidation, has led to a "deterioration in overall corporate credit quality."

Another problem area has been the energy sector, Wright says, which is ony slowly recovering from the "longest and lowest sustained low on price in the long memory of anyone in that industry."

Stacy, at Weiss Ratings, says the tone of concern coming from the FDIC may be a symptom of a "culture of heightened awareness" at the institution following the national banking crisis of the late 1980s.

"Increased lending can be a sign of lower quality and higher risk and that's what they saw before the last crisis," he says. "They're concentrating on not missing any signals of trouble."

Bankers say they are diligently looking for the same thing in their own portfolios and have yet to find cause for alarm

"Banking is not a business without risk, but you have to make sure you manage the risk well," says Sutton at Bank One. "When times are good there's going to be easier access to credit... We're here in the upturns and the downturns. This is where were going to be," he says.