Banks facing highest percentage of bad loans since '92
By Helen Stock
Bloomberg News Service
WASHINGTON — U.S. banks are saddled with more bad debts than they've had in a decade as cable and telecommunications companies struggle to repay loans, a new federal report shows.
Of a total $1.9 trillion in bank loans and commitments, about 13 percent were classified as in default or unlikely to be repaid at the end of June, according to a study by the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency.
That's up from 9 percent a year earlier and marks the biggest proportion since 1992, when about 15 percent of commitments were listed at risk.
"We still have a big overhang of debt out there from highly leveraged companies," said David Gibbons, deputy comptroller for credit risk at the OCC. "Some folks in the business think loan deterioration is peaking. I don't know that it is."
The rise in bad loans comes as prosecutors investigate allegations of fraud at companies such as Enron Corp. and WorldCom Inc. and as an economic recovery slows, regulators said. Risky loans rose to $236.1 billion in the year ending in June from $192.8 billion, a year earlier, according to the survey.
The Shared National Credit review occurs between May and July each year and examines loans of more than $20 million that are shared by at least three banks. The study this year covered 9,328 loans to 5,542 borrowers.
While the percentage of bad loans climbed, the pace of the increase was slower than in 2001, regulators said. Loans classified as "substandard," "doubtful' or "loss" rose by $39.4 billion, or 34 percent, to $157.1 billion, compared with an 86 percent rise in 2001.
Loans that "exhibit potential weakness" rose by $3.6 billion, or 5 percent, to $79 billion, after more than doubling a year ago.
A special subcommittee reviewed telecommunications and cable credits, Gibbons said. About a third of commitments to those industries are at risk, up from about 11 percent last year.
Five of the 10 largest Chapter 11 bankruptcy filings in U.S. history occurred in 2002, including WorldCom, the largest ever with $107 billion in assets; Global Crossing Ltd., with $25.4 billion in assets; and Adelphia Communications Corp., with $24.4 billion in assets.
About 14 percent of the $226.1 billion in credits to companies in the oil, gas, pipelines and utilities industries are at risk, up from 5 percent of $224.5 billion a year ago, the study showed.
Regulators and some investors said banks are better equipped to deal with a high percentage of risky loans than a decade ago. "Strong earnings and capital bases, coupled with diverse revenue sources and balance sheets" are helping banks absorb deteriorating lending conditions, regulators said.
"When you put it in perspective, it's not that bad," said Michael Stead, manager of the Wells Fargo SIFE Specialized Financial Services Fund, which owns bank shares.
