CREDIT CRUNCH: Bad Times for Bank Loans

Corporate borrowers may find a roadblock on their next trip to the bank.
Lisa YoonJanuary 18, 2001

Bad loans are mounting, commercial lenders are tightening the credit spigot, and businesses are getting turned down when they visit the bank to borrow money.

Has the flow been turned off completely? Not quite, but it’s running a lot slower than it did just a year ago.

Wells Fargo & Co. chief credit officer Ely Licht said on Tuesday, “As the economy continues to slow, the company expects increases in credit losses and non-performing loans in 2001.” The San Francisco bank raised its provision for loan losses in the fourth quarter, and it reported a 20 percent jump in non-performing assets over third-quarter levels.

Keep this in mind: Wells Fargo’s loan portfolio hasn’t soured as quickly as those at some other banks. Wells may be getting stingy with its borrowers, but other banks, with more problem loans, are going to get even more Scrooge-like.

As a percentage of the total loan portfolio, Wells’ provision for losses was actually lower than it was last year. The total number of losses grew because the bank issued more loans. Still, Licht’s statement could have easily been applied to the banking industry as a whole, where rising loan losses seem to be a recurring theme.

For example, Bank of America’s provision for credit losses in the fourth quarter soared to $1.2 billion compared to $350 million a year earlier. What’s more, Bank One had a $1 billion pretax increase in the allowance for loan losses.

The dire news accompanying banks’ end of year results is not good news for potential borrowers, according to Gary Gorton, a finance professor at the Wharton School of Business in Philadelphia.

“As banks experience losses and everyone’s view of what’s going on in the world changes, they tend to be stricter” with their lending guidelines,” Gorton says. The process is a natural side effect of an economic slowdown. But just because it’s not unusual given the economic environment, “it doesn’t mean it’s not a cause for alarm.”

Smaller companies and those with poor credit ratings are going to feel the biggest pinch.

“IBM is going to be not as affected as the newest company on the Nasdaq,” Gorton says. “It depends on what kind of access you have to funds. If you don’t have much choice, then you’re going to be most affected.”

Even for tech start-ups, there couldn’t be a worse time for a credit crunch.

“It’s a bit unfortunate, because in this environment, it contributes to the drying up of funds,” Gorton says. “We don’t know for sure, but investors might have been willing to let them make an effort for a little longer were it not for the fact that the [economic] environment itself was changing so rapidly.”

Analyst Diana Yates of A.G. Edwards agrees with Gorton that small firms will be hurt the most. She believes companies with already healthy credit histories will feel little impact.

“It depends on the credit rating of the company,” Yates says. “If you’re a company with good earnings and you’re positively rated, I don’t think you’re going to have that much trouble.”