Banks set new earnings record, but problem loans lie ahead

The U.S. banking industry reported a record $27.7 billion profit in the second quarter of 2002, representing a $2.3 billion, or 9.1 percent, increase over the previous record of $25.4 billion earned in the first quarter, according to Weiss Ratings Inc., an independent provider of ratings and analyses of financial services companies, mutual funds and stocks.

Year-to-date, this brings the industry's profit for the first half of the year to $53 billion, a 17.3 percent increase over the $45.2 billion recorded in the first half of 2001.

Institutions showing the largest year-over-year increase in net income include Citibank NA, with a 41.5 percent increase in net income, US Bank NA with a 154.6 percent increase in net income, and Bank of America NA, with a 19.2 percent increase in net income.

Record low interest rates continued to boost the industry's net interest margin, which rose to 3.59 percent. the highest level since 1999, according to Weiss. In addition, banks and thrifts cashed in on rising bond prices for $ 1.6 billion in income during the first six months of the year.

"The rash of big name corporate bankruptcies has hurt a few vulnerable institutions recently, but most banks are not yet feeling the pain from the economic downturn," said David Lackey, president of Weiss Ratings Inc.

"Interest rates can't go down much further though, and the big buildup in problem loans indicates the party's almost over."

Nonperforming loans climbed to 1.36 percent of all loans outstanding at June 30, 2002, the highest level since 1993.

Troubled commercial loans drove the increase, rising 27.7 percent from mid-year 2001 to midyear 2002. As a result, total nonperforming loans for the industry reached $65.8 billion at the end of the second quarter, an 18.7 percent increase over the $55.4 billion in nonperforming loans reported one year earlier.

Institutions showing the largest year-over-year increase in total nonperforming loans include Citibank NAwith an increase of 72.4 percent in nonperforming loans, JP Morgan Chase with an increase of 65.7 percent in nonperforming loans, and BankOne NA with an increase of 86.9 percent in nonperforming loans.

Weiss issues safety ratings on more than 15,000 financial institutions, including banks and thrifts, HMOs, life and health insurers, Blue Cross Blue Shield plans, property and casualty insurers, and securities brokers.

Weiss also rates the risk-adjusted performance of more than 11,000 mutual funds and 9,000 stocks. Weiss Ratings receives no compensation from the companies it rates. Revenues are derived strictly from sales of its products to consumers, businesses and libraries.