In Focus This Quarter

Indicators of Industry Performance--The reported financial condition of insured banks and thrifts is strong. However, despite projected growth in earnings, bank and thrift stocks underperformed the broader market through October 1999.

Economic Conditions--The economy remains generally strong, and the outlook calls for continued growth. Growth is likely to slow, however, in order to correct financial imbalances that have developed as a result of a rapid creation of household and commercial credit and borrowing from abroad. There is a threat that the adjustment process could be a volatile one.

Emerging Risks in Banking--Rising indebtedness on the part of businesses and households raises concerns about future loan performance. Industry responses to intense competition have created greater credit, market, and operational risks.

Consumer Lending--Banks and thrifts are becoming increasingly involved in subprime consumer lending, which has raised some supervisory concerns.

Commercial and Industrial Lending--Signs of deterioration in corporate credit quality can be found in rising loss rates, slower profit growth, and rising corporate bond defaults. At the same time, banks are expanding their lending to heavily indebted companies in the syndicated loan market.

Commercial Real Estate and Construction Lending--Loans for real estate construction and development are growing rapidly. Despite an uptick in commercial vacancy rates, loan losses remain low.

Agricultural Lending--Low commodity prices are hurting farm operating incomes, but widespread effects on farm banks have yet to materialize.

Funding and Interest Rate Risk--Lagging deposit growth has led to a greater reliance on more volatile, market-based funding, and some institutions are taking on greater interest rate risk to maintain loan growth.

By the Analysis Branch Staff

Regional Perspectives

Economic and Banking Conditions--Weakness in the aerospace, manufacturing, energy, and agricultural sectors continued to limit the Region's growth, which was slower through July 1999 than during 1998. Nevertheless, the strong services and construction sectors buoyed the Region's performance, which exceeded the national growth rate for the same period…Despite generally strong banking conditions, mortgage and agricultural lenders in the Region reported declines in performance, and commercial lenders increased holdings of traditionally higher risk assets…Low prices for many agricultural commodities and declining farm income in some states negatively affected farm banks in the Region, particularly in Montana…While earnings and capital levels at the Region's farm banks have declined only slightly, asset quality in the second quarter of 1999 was at its lowest level for that period in the past five years.

By the San Francisco Region Staff