Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, March 25, 1990 TAG: 9003222655
SECTION: BUSINESS PAGE: D-1 EDITION: METRO
SOURCE: MAG POFF BUSINESS WRITER
DATELINE: LENGTH: Medium
Now, Davis said, "it's the financial services sector's turn in the barrel."
Davis, who follows banking for Wheat First Securities, said the cause of the industry's profit squeeze is the slow pace of credit demand.
The fact that fewer people want to borrow money should logically force down interest rates, thereby reversing the trend.
But that isn't happening, Davis said, because higher inflation in other countries is propping up rates in today's global market.
Not that the bottom is dropping out of banking.
Davis forecasts loan growth of 5 percent to 8 percent, down a factor of two or three points from last year. That's the same amount that 1989 was off from its prior year.
Henry J. Coffey Jr., banking analyst for J.C. Bradford & Co., agreed with that assessment.
The historical growth rate for quality banks - "not those that keep shooting themselves in the foot" - has been 8-12 percent a year since the late 1970s, he said.
What we're likely to see in the next year or so, Coffey said, is growth at the lower end of that range.
The worst-case scenario in the slowing economy, according to Coffey, is that some financial institutions would be forced into "some balance-sheet building."
Although some Northeast banks have had publicized difficulties, Coffey thinks that is unlikely to be repeated in the Southeast.
No Southeast bank that he follows should be forced to cut dividends, Coffey said, much less be "permanently derailed in earning power."
Davis of Wheat First Securities said all banks are reporting steady deceleration of deposits, loans and earning assets.
The country is at the tail end of a seven- to eight-year accumulation of debt, he said.
Now consumers are instinctively lowering their demand for borrowing and paying off the built-up debt of the past years.
"That's good," Davis said. "It should happen that way."
But if the process continues, he said, it won't help the banks' earnings reports.
Dominion Bank's income rose 13 percent last year, but its economist said few banks will post double-digit growth in 1990.
Glenn Bowman said banking, like every other industry, is driven by increases in volume.
In today's environment, where competition is squeezing margins, volume is particularly important. But he said there will be little or no growth.
A slowing economy also worsens the situation of weaker borrowers, Bowman pointed out. Diminishing cash flows add pressure to borrowers with the least capital and staying power.
That is especially a problem in other areas where the economy is not as diverse as it is in Virginia, he said.
Last year, the nation's banks as a whole earned $16.3 billion, according to the Federal Deposit Insurance Corp.
That represented a 34 percent decline from the results in 1988, which was a record year for earnings.
Most of last year's problems resulted from Third World loans by major money center banks. Banks in the Northeast and in the Southwest energy states were also affected by bad real-estate loans.
The FDIC's list of problem banks, on the other hand, shrank from 1,394 in 1988 to 1,093 last year.
Demand for funds now relates directly to interest rates rather than to government manipulation, he said. That may flatten the peaks and valleys of the business cycle.
Philip Davidson, economist with Signet Bank, predicts slower growth and stagnant activity through the first half of the year.
The consumer market is soft, he reported, with deposits growing very slowly. Nor is there much activity in commercial lending.
Alan Gayle, economist with Crestar Bank, sees continued sluggishness for the next few quarters.
He's concerned about high interest rates, especially mortgage rates, due to events in West Germany and Japan.
Gayle still expects a so-called soft landing, where the economy slows but doesn't stop. Continued high rates, however, could increase the risk of a recession.
by CNB