Bank Profits Fall 34% Nationwide, Rise in California

Bank profits tumbled 34% in 1989 as second-half earnings were depressed by mounting real estate woes in the Northeast and problem loans to Third World countries, the government reported Wednesday.

California banks ran counter to the national trend. State bank profits rose to $3.75 billion in 1989 from 1988’s $2.71 billion.

The nation’s commercial banks earned $16.3 billion last year, down from a record $24.8 billion in 1988, the Federal Deposit Insurance Corp. said.

Earnings fell dramatically to a weak $2 billion in the final six months of 1989 after totaling $14.3 billion in the January-June period, the best ever for a six-month period.

Fourth-quarter earnings were held to $2.7 billion after the industry set aside $8.4 billion to cover losses on domestic loans. Most of the problems centered on real estate development lending, but the percentage of sour consumer loans edged up for the fifth consecutive year to 1.6% of the total.

In the third quarter, big banks set aside $7.6 billion to cover Third World debt losses, producing a rare loss for the industry of $740 million. It was the worst showing since the second quarter of 1987, when creation of similar reserves for problem Third World loans resulted in a $10.6-billion loss.

Last year, banks in the oil-producing Southwest continued to recover slowly from the oil and real estate busts of the mid-1980s. Northeastern banks deteriorated sharply, Western and Midwestern banks showed strong gains and Southeastern institutions held steady.

Banks in six states lost money: New York, $3.2 billion; Texas, $537 million; Arizona, $488 million; Massachusetts, $390 million; Connecticut, $378 million, and Louisiana, $28 million.

Bad real estate loans more than doubled in the Northeast, where four states were among the 10 with the highest percentage of sour real estate loans.

The worst, in order, were: Arizona, Texas, Massachusetts, Connecticut, Alaska, Oklahoma, Louisiana, New Hampshire, New York and New Mexico.

Boston-based Bank of New England alone lost $1.1 billion last year, most of it in real estate loans.

Despite the problems, banks continued to pour money into real estate lending, particularly in the Southeast and West. Real estate lending increased 12.8% nationally, compared to a 5.4% growth rate for bank assets generally.