Troubled Business Loans Up 34%

In a further sign of economic weakness, the number of large business loans showing symptoms of stress, including default, shot up 34% this year to $236.1 billion, U.S. banking regulators said Tuesday.

The troubled telecommunications sector, corporate fraud allegations, the tepid economy and repercussions from the Sept. 11 attacks were blamed for the surge.

The Shared National Credit Review of syndicated bank loans--which examines loans of at least $20 million shared by three or more banks--is an annual snapshot issued by the Federal Reserve Board, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency. The review is based on bank data during May and June and in some cases the first quarter of 2002.

A record $19.6 billion in credits were classified as losses, up 145% from the previous year’s losses of $8 billion, the regulators said.

Of those losses, 39% were associated with the stumbling telecommunications and cable industries. Those sectors contributed 75% of the increase in adversely affected loans, regulators added.

At the same time, adversely rated big loans grew at a slower pace than in 2001, when they surged by 86%, regulators said in their annual review.

The increase in troubled loans is a hangover from days of easier credit during the economic boom of the 1990s, analysts said. But for all their troubles, banks are much better diversified than in past recessions, having spread risks by splitting loans with other banks or by packaging loans to sell as securities to investors, thus reducing the likelihood of bank failures.

“It’s evidence of a much more robust financial system than it used to be,” said Christopher Low, chief economist for FTN Financial.

The news came as little surprise to investors, who already had absorbed a string of profit warnings from banks that have been forced to add loan-loss reserves after recent examinations by regulators. Concerns about lending to large corporations were the main factor in driving down a Bloomberg index of 52 bank stocks by 23.5% in the six weeks ended Monday, analysts said.

The actual release of the government loan figures prompted what analysts called a “relief rally” Tuesday, sending the Bloomberg bank index up more than 4%.

“The stocks had just imploded over the last 30 days,” said Hoefer & Arnett banking analyst Richard X. Bove.

“So today they got a breather--it’s a perfect example of sell on rumor, buy on fact.”

Federal Reserve Chairman Alan Greenspan said Monday that despite charge-offs, classified loans and delinquent credits at commercial banks, banks remain healthy on strong profits and high levels of capital and reserves.

Still, Greenspan and other observer warned that more losses may be ahead for banks.

“My worry is that’s not the end of the story,” said Alan Ruskin of 4CAST Inc. about the loans report. Bad loans may spread beyond the hardest-hit industries such as telecommunications, he said.

And though banks still have plenty of credit available, they may be tightening lending standards for some businesses and consumers as losses mount, observers said.

“When you have economic and credit circumstances such as this, there are going to be borrowers who don’t deserve to get credit under the same terms and conditions they might have gotten a few years ago,” said David Gibbons, deputy comptroller of the currency for credit risk.

Times staff writer E. Scott Reckard contributed to this report, and Reuters was used in compiling it.