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The collapse of the subprime mortgage market is stinging financial institutions across the nation that overextended themselves during the housing boom of the past decade.
Many banks are losing millions of dollars, and the worst may be yet to come.
“I think we’re going to see a fourth quarter (of 2007) where it is one of those kitchen sink fourth quarters,” said Sara Walker, senior vice president with Associated Wealth Management, the wealth management arm of Associated Bancorp, the parent company of Green Bay-based Associated Bank.
“We’ll see more and more banks just throw in anything that they’re worried about. You’ll see some significant charges in the fourth quarter – write-downs of loans that are shaky and then huge increases in their provisions for loan losses will depress earnings.”
CitiBank, the largest financial institution in the United States, recently announced about $18 billion in write-downs in the fourth quarter, directly related to subprime lending.
Most Wisconsin banks will not feel such substantial pains, Walker said. But that doesn’t mean ideal conditions for them in 2008.
“The fact that the blowups are occurring has caused a heightened awareness of risk,” she said. “And that, in my opinion, is causing banks to pull back, review their loan portfolios more closely and demand more information from their clients and be a little more picky.”
The tighter lending market will likely continue through most of 2008, regardless of what happens in the economy, Walker said. Banks and their customers are still acclimating to the idea that credit is harder to come by, and lending will be more stringent.
Kurt Bauer, president and chief executive officer of the Wisconsin Bankers Association (WBA), agreed.
“The subprime market has affected the housing market, and that’s trickled down into industry,” Bauer said. “(That has resulted in) flat commercial and mortgage demand, the bread and butter of banks.”
Although there is room for improvement this year, Walker doesn’t see easy credit coming back any time soon.
“Throughout 2008, I don’t believe that those credit fears and credit worries are going to dissipate completely,” she said. “I think they’ll calm down, and we won’t see further tightening. Will we see a return to the slap-happy days of 2006 and the first half of 2007? I don’t think it will happen that fast. I think bankers, in general, we are a conservative lot. And I think those lessons or the reminders of what can happen when the pendulum swings that far will stay with us.”
By the third quarter of this year, bankers and their commercial customers will have adjusted to a somewhat tighter credit market, Walker said.
“In nine months, we’ll be more comfortable with the idea, and it won’t be such a shock,” she said. “I don’t think we’ll be returning to the footloose days, but I think that people will feel a little bit better than they do right now.”
A recent survey of the WBA’s members seems to support Walker’s theory. Sixty-five percent of those surveyed said commercial loan demand will not go up in the next six months.
“The good news is that it’s not likely to get worse,” Bauer said. “There will probably be no recession in Wisconsin, and that’s good news.”
Falling interest rates
Bankers surveyed by the WBA also are predicting that short-term interest rates will fall in the first half of 2008. That could help spur some commercial borrowing, Bauer said.
“The low interest rates makes it attractive to invest in expansion,” he said. “This is an absolutely great time to be a first time home buyer if you’re qualified, or for your business to expand because funds will be cheap.”
Associated Bank expects a slow first half of the year, said Dave Baumgarten, southeast region president and director of commercial banking for the company.
“We are continuing to be very diligent in our approach to credit and underwriting because we understand it is a challenging period for the industry,” he said.
Many of Associated’s commercial clients are growing because of global opportunities, Baumgarten said, which could give the bank new opportunities.
“One segment that is doing quite well is manufacturing companies that do a lot of exporting, with the dollar as low as it is,” he said. “Wisconsin is fortunate to have a lot of manufacturing companies that do a lot of exporting.”
If interest rates continue to fall,
Baumgarten sees more opportunity at the end of 2008.
“I think that with enough positive stimulation that we can avoid the magic word recession,” he said. “The back half of the year can be stronger than the first half, and we can get positioned well for 2009.”
Room for growth
First Business Bank-Milwaukee does not have much, if any, exposure to the subprime mortgage market, said David Vetta, president and CEO.
“The good news is, I believe in Waukesha County and Milwaukee we have a good economy and significant opportunity and shouldn’t be too caught up in a lot of what I would say is a national issue for national banks and different geographies,” Vetta said.
First Business Bank will still look at residential and commercial real estate projects, but those projects will face additional scrutiny this year, Vetta said.
“For us, in a large part, it’s business as usual,” he said. “With our niche and our size, I feel like we have a lot of opportunity. We continue to believe there are a lot of opportunities with folks that are related to development and have sufficient experience and the resources to work through what will be a slow rebound.”
Minneapolis-based U.S. Bank stayed almost completely out of subprime lending, said William Bertha, Wisconsin market president. Bertha said the bank is the sixth-largest bank in the nation.
“We’re not affected by this – we stayed clear,” Bertha said.
The Wisconsin operations of U.S. Bank will post double-digit growth in 2008, Bertha said, and will hire a significant number of commercial and corporate lenders this year.
“Corporate operations in Wisconsin during 2007 was one of the most profitable operations in the country for U.S. Bank,” Bertha said. “Around the country was flat to down, and we were up. We were a leading market in U.S. Bank.”
Because U.S. Bank did not get involved in subprime lending, it is positioned to pick up significant market share at a time when its competitors may struggle.
“We’re clean, we have a huge balance sheet and industry-leading profitability marks,” Bertha said. “We have plenty of liquidity and we’re poised to grow.”
