U.S. Banks Post Record Profits in 3rd Quarter

U.S. banks earned record profits of $5.9 billion between July and September, the Federal Deposit Insurance Corp. said Monday, with much of the earnings coming from large fees paid in leveraged buyouts of big corporations.

FDIC Chairman L. William Seidman said he was pleased with the numbers but in the same breath cautioned banks against concentrating too much of their business in lending for LBOs and real estate in some markets in the East.

The profits of the nation’s 13,239 banks surpassed the previous record high of $5.8 billion in the third quarter of 1987, said the FDIC, which insures bank depositors for up to $100,000.

During the first nine months of this year, banks had profits of $18.7 billion, surpassing the previous full-year record of $18.1 billion in profits in 1985.

Risky Loans

“We can say without much question that this year will be an all-time high for bank profits,” Seidman said at a news conference.

But there is a danger that if the economy falters, highly leveraged corporate borrowers will be unable to meet payments, Seidman said in a separate television interview.

Banks make loans and receive fees for arranging LBOs, acquisitions made with debt rather than equity.

LBO loans “are risky loans because there’s very little room for error. If we have a dip (in the economy), they won’t have the money to pay off the loans,” Seidman said on NBC’s “Today” show.

The Comptroller of the Currency, another federal bank regulator, is expected to issue guidelines to bank examiners soon to help them ensure that banks do not undertake too much risk in lending for leveraged buyouts.

While Seidman stressed that banks’ participation in LBOs did not pose any immediate danger to the insurance fund, “whenever it appears there is an increased concentration of lending, we like to get there ahead of the situation,” he said.

Another source of concern was the banks’ growing involvement in real estate loans in some Eastern states, Seidman said.

Wary of Real Estate Loans

A surprising rise in non-performing assets of $3.2 billion occurred in the third quarter, which included souring real estate loans in all the New England states, New Jersey, Delaware and Florida, the FDIC said.

Banks should keep a careful eye on real estate lending in these areas, Seidman said, but he added that he was not alarmed at this point as the weakness was nowhere near as worrisome as the real estate lending problems in the Southwest.

The FDIC’s list of problem banks has continued to decline, shrinking to 1,418 banks from 1,624 two years ago.