Rising U.S. Business Bankruptcies Seen Causing Pain For Banks
June 05 2009 - 2:57PM
Dow Jones News
Danger is lurking for banks despite an economy that is inching
towards improvement as U.S. business bankruptcies are expected to
rise sharply well into next year.
Banks have so far suffered mostly from souring real-estate loans
rather than from loans tied to large and mid-sized businesses. But
Dan North, chief economist of Euler Hermes ACI, said he expects
Chapter 7 bankruptcies to "ramp up."
"In a recession, even a business with a good management team can
be wiped out because there is nothing to be put back together"
through a restructuring under the Chapter 11 bankruptcy code, he
said. That will drive up loan losses.
Credit insurer Euler Hermes predicts that U.S. bankruptcies will
rise 45% this year from last, to 63,000 in an economy that the
insurer is expecting to contract 3%. That jump is caused partly by
banks tightening their underwriting standards, North said.
Credit rating agency DBRS Inc. said in a recent report, "Many
U.S. companies are strapped for cash as consumer spending and
business investment contracted resulting in a steep decline in
revenue during the latter part of 2008 and into 2009. Combined with
an inability to replace or renew bank lending facilities, many
businesses are defaulting on their debt obligations."
That also means bankruptcies will continue to rise even when the
recession is over, Euler Hermes' North said. Bankruptcies will
taper off slightly next year but they will remain 40% above the
already elevated levels of 2008, his firm predicts.
Banks will face political pressure, and perhaps from investors
demanding to see returns from banks' high capital as the economy
recovers next year, to lend more. But North said that those
pressures will likely prove only an incremental positive to
bankruptcy trends.
Bankers "want to get back to the business of making money" from
lending, but only "at a manageable level or risk." Next year,
bankers "will still be very aware of how severe the crisis was,"
North said.
The vast majority of bankruptcies were, and are expected to
remain, personal bankruptcies. Still, while business bankruptcies
last year were tied mainly to financial-services companies - 25
banks failed - and construction loans, some major industrial
groups, such as paper, metal, and chemical, are now also struck by
the recession.
How badly that will hurt the banking sector, particularly large
regional banks and the nation's biggest banks that hold most of the
commercial and industrial loans, is hard to gauge, because big
businesses finance themselves through bonds and equity in addition
to bank loans.
Still, losses in banks' commercial loan book have been ramping
up - first slowly last year, and more pronounced in the first
quarter, when commercial and industrial loan losses made up 1.8% of
loans, according to data from the Federal Deposit Insurance
Corp.
Overall, first-quarter loan losses were almost twice as high as
a year earlier, the FDIC said. And, "The year-over-year rise in
charge-offs was led by loans to commercial and industrial
borrowers, where charge-offs increased by $4.2 billion."
DBRS wrote that business bankruptcies surpassed the peak levels
of the previous cycle last year, and "there is little to suggest
that business bankruptcies have reached their peak."
Stifel, Nicolaus & Co. analysts said in a research report
that the rising business delinquencies trend "raises the question,
is commercial the next subprime?"
Commercial and industrial, or C&I, loans totaled $1.4
trillion on March 31, almost 20% of total loans and leases among
the 8,200 FDIC insured banks. According to the Federal Reserve's
stress test for the 19 largest banks, C&I loan losses could
total up to 4% over two years under its "baseline" economic
scenario, and twice as much until its "more adverse" scenario.
Bank of America Corp. (BAC) is the nation's largest C&I
lender, with a total of $241 billion in such loans on March 31. The
loss ratio of Bank of America's C&I portfolio remained low at
0.46%, compared to 13.5% for small-business loans.
Wells Fargo & Co. (WFC), Citigroup Inc. (C) and JPMorgan
Chase & Co. (JPM) follow Bank of America as the biggest
commercial lenders; Comerica Inc. (CMA), M&T Bank Corp. (MTB),
and Zions Bancorp (ZION) are among the large regional commercial
lenders, according to SNL.
-By Matthias Rieker, Dow Jones Newswires; 201-938-5936;
matthias.rieker@dowjones.com