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Home > Industry Analysis > Research & Analysis > Regional Outlook |
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Regional Outlook |
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Regional Perspectives
Economic and Banking Conditions
Economic Indicators Remain Positive
With the nation's economy enjoying its longest peacetime expansion on record, the Region's economy continues to strengthen. Employment levels and incomes continue to rise, and joblessness remains low. In the second quarter of 1999, the Region's employment level rose by 305,000 jobs or 1.4 percent. By contrast, employment levels in the nation rose 2.2 percent, reflecting faster rates of economic expansion in parts of the South and West. Personal income levels in the Region are forecast1 to rise between 4 and 5 percent in 1999, more than twice the current 2.1 percent inflation rate. Wage and salary levels in the Region have been rising faster than the rate of inflation since 1995 (see Chart 1), implying real gains for the Region's workforce. Although unemployment rates in some states are somewhat higher than the second-quarter U.S. average of 4.3 percent, they are still the lowest in more than a decade and reflect the strong gains in new job formation. Unemployment rates also have been falling in Puerto Rico, which still has a comparatively high unemployment rate of about 11 percent.
Chart 1 Chart 1
1 Forecast by Regional Financial Associates. Rate of inflation is measured by year-to-year percent change in the U.S. consumer price index during the second quarter of 1999. Office Markets Tighten, with Some Exceptions
The Region's real estate markets continue to benefit from the healthy economy. Office market vacancy rates in many of the Region's largest cities continue to tighten and are at their lowest levels in the 1990s. In midtown New York City, for example, office vacancy rates in 1999 dropped below 5 percent, and rentals in many buildings exceeded $50 per square foot. Rents have been pushed higher, in part because of the relative lack of new office construction over the past decade. In Wilmington, Delaware, demand for office space from a thriving financial services sector has driven vacancy rates below 5 percent. In the Washington, D.C., area, office vacancy rates also are close to 5 percent. Although the government workforce and government spending dominate, an influx of high-tech industries has helped tighten vacancy rates around the nation's capital. New office building construction has been reported in the Albany, New York, and northern and central New Jersey office markets.2 In the Albany area, new demand for office space resulted in a 22 percent increase in commercial building contracts during the first half of 1999 compared with the same period in 1998. The Albany area economy, although continuing to lag behind the Region's overall economic growth rate, finally appears to be benefiting from the healthier economic climate. The northern and central New Jersey markets, particularly along the Hudson River, are reaping benefits from the strong New York City economy. With rents ranging between $22 and $26 per square foot, office space can be one-half the cost of midtown Manhattan, which has attracted tenants unwilling or unable to pay the steep Manhattan prices. Approximately 3.8 million square feet of new office space is under construction in these New Jersey markets, some of it speculative. Some companies, however, have been consolidating their operations, thereby freeing up space that is competing with new buildings. This combination has pushed office vacancy rates above 10 percent. The increase is most pronounced in the I-78 corridor in Somerset County, where vacancy rates exceed 18 percent. In some local townships, office vacancy rates top 30 percent, reflecting new, unfilled construction. Most real estate observers, however, believe that the buildup of space is temporary and the space should be filled if the economy continues to grow. Nevertheless, there is potential for overbuilding of office space in these markets. 2 For Albany, see "Construction on the Rise in the Region," Albany Times Union, July 30, 1999. For New Jersey, see "Office Space for Sublet Jumps as Companies Revamp," New York Times, July 4, 1999, and "Building Boom at Carnegie Center," Trenton Times, August 19, 1999. Despite signs of increased construction of office space in some markets, commercial real estate (CRE) loans in the Region's financial institutions have risen only slightly in the past year and are still below the levels reached in the late 1980s. In addition, asset quality indicators for CRE loans reported by the Region's banks remain strong. Banks Report Healthy Performance, although Savings Institutions Lag
The Region's banks and thrifts reported generally healthy financial conditions in the second quarter of 1999. The Region's average return on assets (ROA) was 0.89 percent, compared with 1.03 percent in the second quarter of 1998. The average net interest margin (NIM) declined to 3.89 percent in the second quarter, compared with 4.07 percent a year earlier and 4.20 percent two years earlier. The average reported leverage capital ratio remained strong, rising a solid 127 basis points over the second quarter 1998 figure. This figure is somewhat distorted by the influx of new banks, which have very high capital ratios in the beginning until assets begin to build. Aggregate past-due ratios continued to decline, down 20 basis points from a year earlier, to 2.27 percent. The decline reflects improvement in almost all loan categories, with the exception of commercial and industrial loans, which experienced a modest rise in past-due levels. Past-dues on credit card loans were stable, while credit card charge-offs were 3.46 percent in the second quarter of 1999, significantly lower than the near 5.0 percent level reported during much of the past three years. Savings institutions (savings banks and savings and loan associations), which make up 38 percent of the Region's financial institutions (and 13 percent of assets), continued to report lower average ROA numbers than commercial banks did. In the second quarter of 1999, savings institutions reported an average ROA of 0.75 percent, compared with 0.97 percent for commercial banks. Savings institutions' profitability levels are lower than their commercial bank counterparts as reflected in lower NIMs; the group's average NIM of 3.31 percent was 95 basis points lower than the commercial banks' average. Although banks have faced narrowing interest margins in the past few years because of intense industry competition and a flat yield curve environment, savings institutions continue to rely heavily on low-yielding residential mortgages, resulting in a weaker bottom line. Savings institutions reported 40 percent of assets in residential mortgages on June 30, 1999, compared with about 10 percent for commercial banks. Savings institutions also reported less noninterest revenue to bolster the bottom line (median noninterest income to earning assets was 0.30 percent compared with the commercial banks' 0.68 percent). These factors contributed to savings institutions' weaker earnings performance. For more information on the challenges facing savings banks, please see "Savings Institutions Underperform Commercial Banks" in the New York Region's Regional Outlook, Second Quarter 1999. Commercial and Industrial Lending Grows Slightly
Commercial banks in the New York Region have experienced modest growth in their commercial and industrial (C&I) lending portfolios in the past few years, although C&I loans account for substantially less of the banks' portfolios than in the late 1980s and early 1990s. C&I loans made up 17.9 percent of total loans and 9.7 percent of total assets on June 30, 1999, compared with 16.4 percent and 9.0 percent as of June 30, 1995, this decade's low point. These loan portfolio concentrations have been increasing steadily over the past four years, even though the total loans-to-assets ratio has declined in the past two years. Small-business lending (C&I loans under $1 million), traditionally the main niche of smaller financial institutions, is becoming particularly competitive. Larger institutions are becoming more aggressive in marketing products to small businesses. The Region's banks with assets over $1 billion have increased small-business loans from 5.2 percent of total loans on June 30, 1995, to 6.5 percent on June 30, 1999. In contrast, community banks (institutions with less than $1 billion in assets) have experienced relatively little growth in this type of lending, even though they traditionally have been more active, holding 12.4 percent of total loans in small-business credits. Although reported C&I loan asset quality indicators remain favorable, aggregate past-due and charged-off C&I loan levels have risen since midyear 1997 (see Chart 2). The slightly weaker credit quality is influenced in part by rising past-dues at the Region's larger institutions. Community banks' aggregate past-due ratios are significantly higher but have been falling steadily for seven years. Community institutions also have higher charge-off ratios; as of June 30, 1999, the C&I charge-off ratio was 43 basis points higher than large banks. These differences have been consistent in the Region for several years. Chart 2
Recent regulatory agency underwriting surveys3 report findings consistent with current favorable asset quality indicators, but note some concern in the event of an economic downturn. These surveys suggest that commercial and industrial loan underwriting standards have remained fairly stable since late 1998. Interestingly, one-third of banks surveyed recently by the Federal Reserve Board (FRB) stated that their commercial and industrial loan portfolios have become more sensitive to periods of economic weakness. This sensitivity was most often attributed to borrowers' increased financial leverage, borrowers' narrowing profit margins, and some previous easing of credit standards. 3 The August 1999 Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices and the FDIC Report on Underwriting Practices for the period October 1998 through March 1999. Competition for business loans is intensifying at a time when some potential weaknesses are emerging. Despite the strong economy, business bankruptcies rose 13 percent between the first and second quarters of 1999, the first increase since the second quarter of 1997. Further, there is some concern that the increase in nonperforming C&I loans results in part from looser underwriting standards because of competitive pressures. Corporate defaults also are on the rise. One Standard and Poor's analyst stated that he believes the rising default rate "is the result of credit-quality problems built into...loans from their inception."4 Any weaknesses in underwriting could become more evident if the economy falters, thereby affecting corporate profits, or if demand for corporate loans in the secondary market dissipates, which could make refinancing more difficult or more expensive. 4 Leo Brand, Structured Finance Analyst, Standard and Poor's, in American Banker, August 19, 1999.
Regional Outlook Information |
| Last Updated 12/15/1999 | insurance-research@fdic.gov |