State’s Bank Stocks Sink Amid Concern Over Lending Losses
California bank stocks sank further Friday amid worries that the strong U.S. economy of recent years has lulled lenders into relaxing their credit standards--which now is translating into rising bad loans as the economy slows.
UnionBanCal Corp., parent of Union Bank of California, took the biggest hit after it said Thursday it won’t meet second-quarter earnings targets because it is setting aside $70 million for expected loan losses. The state’s third-largest bank predicted its credit problems would continue through much of the year as it takes a closer look at its portfolio.
“When times have been as good for as long as they have, there’s a tendency to get sloppy,” said Robert Walker, vice chairman at San Francisco-based Union. “We have gone through and tightened up our processes quite extensively. We have, in effect, raised the internal bar.”
Wall Street remained skeptical, driving down the bank’s stock price by 30% on Friday to a three-year low. The stock closed at $19.94, down $8.75 in New York Stock Exchange trading.
Although fears over potential credit problems slammed nearly all bank stocks Friday, investors were particularly hard on shares of banks with major California operations, including Imperial Bancorp, down $2.81, or 16.6%, to $14.06; Wells Fargo, down $3.75, or 8.9%, to $38.31; and City National, down $2.56, or 6.8%, to $35.19.
By contrast, the Standard & Poor’s index of 25 regional bank stocks nationwide fell 6.2%.
The bank stock slump began Thursday with the UnionBanCal announcement and an earnings-shortfall announcement earlier that day from Southeastern regional giant Wachovia Corp.
“We’ve been saying for nearly a year that the banks’ outlook was too optimistic,” said David Trone, analyst at Credit Suisse First Boston in New York. “We’ve already seen some earnings disappointments and there are still more out there to come.”
However, analysts say these recent credit problems are not nearly as severe or troubling as the industry’s loan woes in the early 1990s, when California’s economy and real estate market sank into a long recession.
“We’re merely returning to more normal levels of credit losses after nearly a year of record levels of high quality,” Trone said.
Much of the problem is with syndicated loans, in which several banks join forces to spread the risk of lending to a highly leveraged firm. Rising interest rates over the last year have squeezed many of those borrowers, causing them to fall behind on their payments or file for bankruptcy.
“The common thing that these customers have is that their plans are not coming to fruition [and] their forecasts are not being met in an increasingly competitive and difficult environment, despite what you read in the newspaper about high growth rates in the economy,” said Peter Butcher, chief credit officer at Union Bank.
He said about 40% of the bank’s $70-million loan-loss provision is attributable to two national retailers that are experiencing financial difficulties. He didn’t disclose the names of the retailers.
The increase in Union’s bad loans, which follows last quarter’s $40-million loan-loss provision, means the bank’s second-quarter operating earnings will fall somewhere between 77 cents and 82 cents a share, well below analysts’ expectations of 88 cents a share.
Last month, Imperial Bancorp in Inglewood reported that its loan charge-offs would rise “significantly” in its second quarter, mostly from its share of a syndicated loan to an insurance company that filed for bankruptcy.
This week’s bank stock sell-off sent Imperial tumbling 21% in all.
Officials at Bank of America declined to comment Friday on its loan portfolio. The stock fell $3.94, or 7.6%, to $48.
A spokesman for City National noted the bank has recently reduced its exposure to syndicated loans to less than 10% of its total portfolio.
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Western Worries
Amid a broad decline in bank stocks this week, two California banks--UnionBanCal (ticker symbol: UB) and Imperial Bancorp (IMP)--were among the hardest hit. Weekly closes on the New York Stock Exchange:
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UnionBanCal
Friday: $19.94, down $8.75
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Imperial Bancorp
Friday: $14.06, down $2.81
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Source: Bloomberg News
