Credit

Bad Loans Rising

Non-performing loans jump sharply at U.S. banks
Joseph McCaffertyApril 26, 2001

Nonperforming loans at U.S. banks jumped 26.6 percent last year compared with a 2.9 percent increase in 1999, according to a study by Weiss Ratings Inc. At year-end, loans with potential repayment problems reached $48.8 billion, up a staggering $10.2 billion from the $38.6 billion level recorded at the end of 1999.

“In the 1990s, many banks became complacent and loosened their underwriting standards on commercial lending,” said Martin Weiss, the agency’s chairman, in a statement. “Now, even though the economy is not yet officially in a recession, non-performing loans have already begun to surge—a harbinger of more troubles ahead.”

Profits at U.S. banks were also off for the first time in 10 years. Net income dropped 0.8 percent in 2000, to $81.8 billion from $82.6 billion in 1999. The decline in profits was even more pronounced in the industry’s return on assets (ROA), a common measure of bank profitability, which declined to 1.17 percent in 2000, off from 1.32 percent in 1999.

Despite the decline, 67 percent of the nations banks and thrifts actually registered higher profits in 2000.

Nonperforming commercial loans contributed the most to troubled borrowing. They were up 59.7 percent last year to $16.7 billion, after a 36.5 percent increase in 1999. “We expect to see further deterioration in the industry for at least another year or so until banks have had time to tighten lending standards and the economy starts to recover,” added Weiss.

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