Some Perspectives on the Banking Environment: 1988-1992Bureau of Business Researc

Hadaway, Beverly L.

English

Texas ScholarWorks

, ) Bureau of Business Research College and Graduate School of Business, University of Texas at Austin February 1993 Some Perspectives on the Banking Environment: 1988-1992 During the last half of the 1980s the banking industry experienced unprecedented losses and massive failures. Nowhere was the situation more dismal than in Texas. With over 11 percent of the nation's banks, the state accounted for roughly 57 percent of bank failures in 1988. However, in recent months bank profits, bol-stered by low interest rates, have risen to record levels. The pace of failures has eased and the focus has shifted to troubled institutions in New England and California. With less than 5 per-cent of the nation's banks, New England accounted for 24 percent of 1992 failures. Does improvement in bank profits and capital ratios signal a recovery in the business of bank-ing? This article considers this question in a review of the banking environment in Texas and the nation over the last five years.1 A combination of factors created the banking problems of the 1980s. Deregulation raised the cost of funds dramatically. Shrinking profit mar-gins caused many bankers to pursue higher risk loans in an effort to maintain profit margins. Regulatory changes extended to many new and inexperienced competitors the banking industry's exclusive right to issue interest-bearing check-able deposits. Many of these competitors, ex-empt from holding reserves, became the low-cost producer. Extension of the deposit in-surance umbrella encouraged growth through brokered deposits. Cascading oil and gas prices worsened the situation in states with energy-based economies. Together, these factors resulted in high-risk lending not warranted by the indus-try's capital base. Further, archaic inter- and intrastate branching laws prevented bank mergers, caused inefficien-cies in an already overpopulated industry, and stifled the ability of domestic banks to compete internationally. Against a backdrop of mounting failures, Congress passed legislation to strength-en the industry's capital base. Regulators, armed with new risk-based capital guidelines and a mandate to reduce, if not eliminate, high-risk lending, proceeded with a "take no prisoners" mentality. The impact on the banking industry has been a considerable contraction in both the number of banks and the services they collec-tively offer. The number of U.S. banks declined over 10 percent in the last five years. Over the same period the number of Texas and New England banks declined 26 and 18 percent, respectively.2 Banks have not been uniformly affected by this reduction. In Texas and the nation, the number of banks with assets of less than $50 million has decreased while all other asset categories have increased. New England banks with less than $50 million in assets and those with more than $1-$5 billion in assets declined in number. As the number of larger banks has increased so has their share of total bank assets. National-ly, banks with assets of $100 million or less hold a smaller percentage of total bank assets than in 1988. In Texas, banks with assets of $1 billion or less hold a smaller percentage of total bank assets than in 1988. In New England, all asset categories except the largest banks have a smaller share of total bank assets. From 1988 to 1992 the annual growth rate of bank assets nationwide came to a halt and total bank loan growth declined. The reduction in the number of commercial and consumer loans was even more dramatic, falling 9.44 and 2.9 per-cent, respectively, in 1991. Not surprisingly, as lending declined, investment in securities grew from 17.61 to 20.95 percent of total assets during this period. These events, coupled with a mone-tary policy conducive to increasing net interest margins, have resulted recently in reports of improved earnings.3 tdtl I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJDr The story is similar in Texas, with two nota-ble exceptions. First, the contraction in deposits and loans preceded the national and New England experience. Consequently, it is not un-expected that Texas banks seem to be leading the rebound in these loan categories. Through the second quarter of 1992, total loans in Texas had increased 2.9 percent and consumer loans were up 1.29 percent. For the same period all commercial banks and New England banks ex-perienced a decline in total lending (down 1.13 and 3.40 percent, respectively) and consumer lending (down 3.39 and 8.71 percent, respective-ly). Secondly, the overall decline in consumer lending in Texas from 1988 to 1992 has not been as severe as the decline in either the na-tion or New England. (See following table.) Commercial and industrial lending continues to suffer in both Texas and New England. From 1988 to 1992 the loan-to-deposit ratio increased for all U.S. banks except those in the more than $50-$100 million category. The ratio increased for all categories of Texas banks. The securities-to-asset ratio increased for all asset categories of both U.S. banks and Texas banks. Return on assets (ROA) improved for all asset categories of Texas banks and all U.S. banks ex-cept those with more than $5 billion in assets. Return on equity (ROE) improved for all asset categories of Texas banks. Nationwide, banks with assets of more than $1 billion experienced a decline in ROE.4 A closer analysis of the Texas banking en-vironment is warranted. As the following table with data on Texas commercial banks shows, the top five banks accounted for slightly less than half of total bank assets and deposits and about 54 percent of the loans in Texas in 1992. With the exception of NationsBank, the top five banks experienced a decline in asset, deposit, and loan growth over the 1988-1992 period. The impact of the recapitalization of the top five banks is evident: in 1992 these banks accounted for 42 percent of bank equity capital in the state, an increase of 9.8 percent from 1988. Banks in the "all other" category experienced an increase in asset and deposit growth between 1988 and 1992. Likewise, their share of all as-sets and deposits increased. However, their share of total loans in Texas actually declined slightly. For these banks, loan growth between 1988 and 1992 decreased approximately 13 percent. Several trends emerge from this discussion: (1) the banking industry is consolidating, either through acquisitions or failures; (2) large banks are gaining in both number and percentage of assets held at the expense of smaller banks ; (3) growth in total assets, deposits, and loans has declined sharply; (4) commercial and industrial lending have declined more than consumer lend-ing; (5) low interest rates have improved net in-terest margins and profits; and (6) the banking problems in Texas generally preceded the na-tional experience, and Texas is apparently show-ing signs of leading the rebound with positive loan growth in 1992. The evidence suggests that while bank profits have benefited from liberal monetary policies over the last twelve to eighteen months and capital ratios have improved, the business of banking has not recovered. Banks, with noted exceptions, are not making loans. As the name implies, commercial banks are in business to make com-mercial and industrial loans. So why is business lending lagging? One explanation lies with the way regulators have dealt with the industry's problems. Enforcing tough new regulations with an "iron hand" has seriously constrained other-wise profitable lending. Banking, like free enter-prise, is not and should not be a "risk free" undertaking, and regulators who attempt to make it so are misguided. A growing economy needs dependable and flexible sources of funds. Bankers have traditionally filled that need. - Beverly L. Hadaway Capitol City Savings Regents Fellow and Associate Professor of Finance University of Texas at Austin Notes 1. Data in the analysis are taken from the FDIC call reports for all commercial banks. W.C. Ferguson & Co. is the data source. For 1988-1991, data are based on year-end Dec. 31 reports; 1992 data reflect June 30 results. A table summarizing the total number of banks and failures for the U.S., Texas, and New England, as well as the changes in number and asset distribution of banks, from 1988-1992 is available upon request to the Bureau. Space limitations preclude their display in this publication. 2. New England banks are those in Federal Reserve District 1. 3. Selected balance sheet, profitability, and liquidity data for domestic commercial banks from 1988-1992 are avail-able in table form upon request to the Bureau. 4. Selected data for U.S. and Texas commercial banks by asset size from 1988-1992 are available in table form upon request to the Bureau. tdtl I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJDr ltlllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllUr Selected Bank Data: Texas and New England, 1988-1992 (in thousands) Jun30 Texas 1988 1989 1990 1991 1992 Balance sheet Total :issets $171,102,385 $174,948,213 $170,830, 718 $168,883,659 $169,021,214 Percentage change -7.44 2.25 -2.35 -1.14 0.08 Total deposits $143,395,714 $143,899,667 $145,642,746 $147,468,091 $145,911,824 Percentage change -3.37 0.35 1.21 1.25 -1.06 Total loans $88,907 ,983 $82,496,550 $77 ,888,464 $75,595,612 $77,785,426 Percentage change -14.78 -7.21 -5.59 -2.94 2.90 Commercial and industrial loans $29,326,854 $28,884,052 $26,064,779 $24,542,684 $24,017,020 Percentage change -15.63 -1.51 -9.76 -5.84 -2.14 Commercial and industrial loans/ total assets (percentage) 18.00 16.82 15 .89 14.90 14.37 Consumer loans $13,365,872 $14,157,287 $14,498,255 $14,261,572 $14,445,210 Percentage change -1.80 5.92 2.41 -1.63 1.29 Consumer loans/total assets 7.58 7.95 8.29 8.47 8.50 (percentage) Profitability Net interest margin 2.83 2.93 3.45 3.73 4.11 (percentage) Liquidity Securities/assets ratio 18.78 21.47 24.71 29.29 31.82 (percentage) Market value/book value 97.93 100.31 100.80 103.11 102.20 (percentage) Jun30 New England 1988 1989 1990 1991 1992 Balance sheet Total assets $298,521,635 $306, 130,203 $279,373, 133 $265,600,242 $261,829,077 Percentage change 15.84 2.55 -8.74 -4.93 -1.42 Total deposits $230,606,558 $238,507,556 $229,634,469 $215,335,036 $212,089,458 Percentage change 13.87 3.43 -3.72 -6.23 -1.51 Total loans $211,557,698 $215,608,293 $190,627,955 $167,724,216 $162,029,259 Percentage change 17.15 1.91 -11.59 -12.01 -3.40 Commercial and industrial loans $48,059,237 $48,074,039 $41,066,929 $33,333,323 $33,312,142 Percentage change 12.24 0.03 -14.58 -18.83 -0.06 Commercial and industrial loans/ total assets (percentage) 16.34 15.90 15.22 13.65 12.64 Consumer loans $23,221,754 $21,334,962 $17,014,305 $14,383,417 $13,131,029 Percentage change 8.50 -8.13 -20.25 -15.46 -8.71 Consumer loans/total assets 8.02 7.37 6.55 5.76 5.22 (percentage) Profitability Net interest margin 3.64 3.37 3.16 3.35 3.85 (percentage) Liquidity Securities/assets ratio 16.16 14.32 14.28 17.58 20.4 ~ (percentage) Market value/book value 98.47 100.30 100.27 103.61 102.59 (percentage) ltl I I I I 1 I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I l*1r Jtlllllllll lllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllllAr Texas Commercial Banks, Segmented by Five Largest and All Others, 1988-1992 Total assets (percentages) 1988 1989 1990 1991 1992 Top five NationsBank 14.99 19.29 19.16 19.23 19.44 Texas Commerce 12.11 11.82 10.76 10.66 10.19 First City 7.66 8.81 8.54 5.99 5.09 Bank One/feam Bank 12.32 9.45 11.34 11.42 10.88 First Interstate 3.98 3.72 3.08 3.25 3.18 Total top five 51.02 53.09 52.88 50.56 48.78 All others 48.98 46.91 47.12 49.44 51.22 Total loans (percentages) 1988 1989 1990 1991 1992 Top five NationsBank 13.14 15.61 16.51 18.81 20.88 Texas Commerce 11.73 10.89 11.76 12.23 11.63 First City 8.68 10.41 10.60 7.70 6.53 Bank One/feam Bank 14.73 12.20 12.60 12.16 11.38 First Interstate 5.19 5.02 4.06 3.53 3.27 Total top five 53.47 54.13 55.53 54.43 53.69 All others 46.53 45.87 44.47 45.57 46.31 Total deposits (percentages) 1988 1989 1990 1991 1992 Top five NationsBank 14.33 17.81 18.26 18.13 17.75 Texas Commerce 10.13 10.10 10.03 9.83 9.46 First City 7.07 7.96 7.29 6.09 5.40 Bank One/feam Bank 11.62 8.88 11.35 11.60 10.96 First Interstate 4.29 4.15 3.28 3.37 3.30 Total top five 47.44 48.90 50.21 49.02 46.87 All others 52.56 51.10 49.79 50.98 53.13 Equity capital (percentages) 1988 1989 1990 1991 1992 Top five NationsBank 13.13 18.25 16.66 15.57 15.14 Texas Commerce 13.41 13.85 10.36 10.14 9.98 First City 8.66 9.42 5.41 3.47 2.57 Bank One/Team Bank -5.31 -6.16 10.22 10.89 10.91 First Interstate 2.41 1.14 2.49 3.27 3.50 Total top five 32.30 36.51 45.14 43.34 42.10 All others 67.70 63.49 54.86 56.66 57.90 Jtlllllllll llllllllll lll llllllllllllllllllllllllllllll llllllllllllllllllllllllllllAr jll I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJJr7 1.35 1.30 1.25 1.20 1.15 1.10 1.05 1.00 0.95 Employment and Unemployment Rate by Metropolitan Area Total nonagricultural employment Total employment Unemployment (thousands) (thousands) rate Percentage Percentage Area Nov. 1992 Nov. 1991 change Nov. 1992 Nov. 1991 change Nov. 1992 Abilene 50.8 49.4 2.8 49.4 47.8 3.3 6.8 Amarillo 80.6 80.4 0.2 92.2 92.0 0.2 5.7 Austin 403.9 398.0 1.5 437.4 431.2 1.4 5.2 Beaumont -Port Arthur 156.6 153.3 2.2 164.8 161.0 2.4 10.0 Brazoria 73.5 73.0 0.7 88.8 88.5 0.3 8.0 Brownsville-Harlingen 83.2 79.l 5.2 100.6 95.4 5.5 12.4 Bryan-College Station 60.1 58.7 2.4 64.9 63.l 2.9 4.0 Corpus Christi 137.9 136.5 1.0 152.0 150.5 1.0 9.6 Dallas 1,387.3 1,385.5 0.1 1,342.4 1,344.3 -0.1 7.1 El Paso 217.3 211.2 2.9 229.9 224.2 2.5 11.0 Fort Worth-Arlington 592.0 589.0 0.5 683.1 682.4 0.1 7.0 Galveston-Texas City 81.1 79.4 2.1 106.7 104.1 2.5 9.0 Houston 1,643.1 1,646.5 -0.2 1,647.2 1,650.0 -0.2 7.6 Killeen-Temple 79.3 75.7 4.8 94.5 90.1 4.9 8.0 Laredo 50.9 48.l 5.8 52.9 50.3 5.2 10.2 Longview-Marshall 70.8 70.7 0.1 73.8 73.6 0.3 9.7 Lubbock 99.l 98.l 1.0 108.4 107.3 1.0 6.5 McAllen- Edinburg-Mission 111.2 106.0 4 .9 140.8 134.4 4 .8 17.0 Midland 46.0 47.0 -2.l 45.7 46.7 -2.l 8.0 Odessa 45.0 46.0 -2.2 48.7 49.8 -2.2 10.3 San Angelo 39.2 38.4 2.1 43.3 42.7 1.4 6.1 San Antonio 547.0 533.0 2.6 579.7 566.l 2.4 6.6 Sherman-Denison 37.2 37.2 0.0 43.0 43.4 -0.9 7.5 Texarkana 47.9 46.8 2.4 53.2 52.8 0.8 7.3 Tyler 64.0 63.3 I.I 69.5 69.l 0.6 8.3 Victoria 30.9 30.8 0.3 36.4 36.4 0.0 6.4 Waco 84.2 83.9 0.4 87.9 87.0 1.0 6.7 Wichita Falls 50.6 50.2 0.8 50.8 50.5 0.6 7.1 Total Texas 7,276.2 7,185.3 1.3 8,056.3 7,979.8 1.0 7.7 Total United States 109,582.0 109,106.0 0.4 118,239.0 117,110.0 1.0 7.0 Note: Data are not seasonally adjusted . Figures for 1991 have undergone a major revision; previously published 1991 figures should no longer be used. Revised figures are available upon request. All 1992 figures are subject to revision . Sources: Texas Employment Commission and U.S. Department of Labor, Bureau of Labor Statistics. Nonagricultural Employment In Five Largest Texas Metropolitan Areas (January 1984=1.00) 1.30 1.25 1.20 1.15 1.10 1.05 1.00 0.95 Total Employment In Five Largest Texas Metropolitan Areas (January 1984=1.00) 0. 90 -t-----t---+--+---'f----+---+--1---+-1~1~1~1~1~1~1~1~1~ 0. 90 -t-----t---+--+----tf----+---+--1---+-1~1~1~1~1~1~1~1~1~ jtl I I I I 111111111111111111111111111111111111111111111111111111 11111111111111 I IJDr ttt1 1111 1 111111111111111111111111111111111111111111111111111111111111111111111111 inr Editor: Lois Glenn Shrout Assistant Editor: Sally Furgeson Texas Business Review is published six times a year (February, April, June, August, October, and December) by the Bureau of Business Research, Graduate School of Business, University of Texas at Austin. Texas Business Review is distributed free upon request. The Bureau of Business Research serves as a primary source for economic and demographic data on the state of Texas. An integral part of UT Austin's Graduate School of Business, the Bureau is located on the sixth floor of the College of Business Administration building. Announcement At press time, Bureau staff were completing entry verification, editing, and categorizing of information from the annual survey of manufac-Q96l NI1Sfl S~IliVlHil, SOd :> 99"1~£ fit•• z 1 Jd i Xi :JO J\INO TL 9-J:>N J ~3.:SJ li turing firms that will be published as the 1993 Directory of Texas Manufacturers. More than 60 percent of the entries from the 1992 edition were updated as a result of responses to the sur-vey, and our data indicate 909 companies have been dropped and 1,000 added, for a total of more than 17,000 manufacturers. The Directory, which has been the primary resource for information on Texas manufacturers since 1933, is supplemented monthly by reports on new and expanding firms in Texas Industrial Expansion. In early March the two-volume directory should be ready for release to the pub-lic. Purchase price for the Directory, which in-cludes twelve issues of Texas Industrial Expansion, is $125 plus tax for Texas residents. To order the Directory and Texas Industrial Expansion, call (512) 471-1616 or fax (512) 471-1063. If you need company information on diskettes or mailing labels, call (512) 471-1616 for more information. 6s;t;>L-£Il8l St?X~.L 'U!lSny 6s;t:>L xos: Ud H~v::rs::ra ss::i:N1sna .:10 nv::rana 

Some Perspectives on the Banking Environment: 1988-1992

https://repositories.lib.utexas.edu/bitstream/2152/40144/1/tbr-1993-02.pdf

Some Perspectives on the Banking Environment: 1988-1992

Abstract

Similar works

Full text

Available Versions

Texas ScholarWorks