After eight years of surging profits and rapid loan growth, bankers are worried this year that the slowing economy will result in more problem loans and a stunted bottom line.
Federal Reserve Board recently cut interest rates. Bad loans are growing, profit margins are shrinking, and income from fees charged consumers and corporate borrowers is declining.
While some bankers remain optimistic that the industry will continue to perform well, the tone this year is more guarded than anytime in the past 10 years.
"As a banker my concern is there is clear credit deterioration," said H. Furlong Baldwin, chairman and chief executive of Baltimore's Mercantile Bankshares Corp., the largest independently owned banking company in the state, with $8.2 billion in assets. "How bad is it? You can't tell yet. If you have deteriorating credit problems, it pervades everything."
Joseph Haskins Jr., chairman and chief executive of Harbor Bankshares Corp., a community bank in Baltimore with $168 million in assets, hopes the economy will maintain momentum in 2001. But he believes that banking will be "more challenging" this year than in the past two years.
"You are wondering if this is the calm before the storm," Haskins said. "I will tell you what is frightening to me is when I see 300 people are going to be laid off here and 500 are going to be laid off there. Can these people be absorbed very quickly?"
Bankers have been incredibly successful over the past eight years, riding on the tail of a robust economy. Profit has soared 20.8 percent on average from 1992 to 1999 when the industry made a record $71.7 billion. Credit quality has been superb, assets have grown and capital levels have been high.
But last year, problem loans began eating away at the bottom line, and profit weakened.
As bad loans grew, bankers made it more difficult for corporations - movie-theater operators, nursing homes, telecommunication and Internet companies - and individuals with riskier credit histories to borrow money.
Now, experts worry that bankers could kick off a "credit crunch" if the economy continues to slow.
"I think it is going to be a struggle to keep it in balance," said Diane M. Casey, president and chief executive of America's Community Bankers, a trade group in Washington that represents 1,200 banks and savings and loans.
"The regulators have all issued several notices ... about their concerns about credit quality. Banks are definitely tightening their credit standards. I think the bankers are cognizant that they don't want to make it into a credit crunch."
Experts believe bad loans will continue to rise this year. Indeed, they have been on the upswing, with banks writing off $5.7 billion in loans in the third quarter last year, up 16.5 percent from the third quarter in 1999, according to the Federal Deposit Insurance Corp.'s most recent numbers.
"There have been some cracks in the wall," said David West, a banking analyst at Davenport & Co. in Richmond, Va. "Asset quality is the constant concern."
He expects the year to turn out OK for the industry.
"I hope ... on the asset quality front that we slide through and avert a really horrible year," he said.
Even though the industry faces problems, the mood is still relatively upbeat about prospects this year, especially among smaller banks, which have avoided many of the loan problems that have hurt larger institutions.
"I keep reading where things are slowing down and I guess they are," said Peter M. Martin, chairman and chief executive of Baltimore's Provident Bankshares Corp. "We are not seeing it. Our loan growth is good, demand still seems to be there, and there are good credits."
Provident's goal is continued growth in 2001, which might include expanding through acquisition in Northern Virginia where the company already has branches, Martin said.
"Quite frankly, if we could find a good fit over there we would like to do that," he said.
The bank also plans to significantly increase the number of loans it makes to small businesses. The market for those loans is "actually huge," Martin said.
Haskins, too, expects Harbor to grow this year, despite the slowing economy.
Bankers believe that a Republican administration, headed by President George W. Bush, will be friendly to the industry.
Martin hopes a Bush administration will overhaul the bankruptcy code and make it more difficult for unscrupulous borrowers who declare bankruptcy to hide assets.
Casey expects a Bush administration to push through regulatory relief measures that will help banks operate with less red tape.
"We are looking for it to be a good year," she said. "Our members have been fairly bullish."