At Hibernia, Getting a Handle on Bad Loans - TheStreet

Hibernia

(HIB)

became the latest bank to face the facts about bad loans to businesses, as a new CEO seeks to get a handle on credit quality.

The New Orleans-based bank, whose CEO resigned abruptly on Monday, warned Thursday it will fall short of fourth-quarter and 2000 earnings expectations as it takes a hefty $70 million hit to profits to bulk up its loan-loss provision (essentially a cushion to cover the cost of bad loans). That amount accounts for more than half of the roughly $120 million bad-loan expense the bank expects for the full year. Hibernia now expects fourth-quarter earnings of 10 cents a share, compared with the

First Call/Thomson Financial

analyst consensus estimate of 34 cents, and 2000 earnings of $1.04, well below the $1.29 consensus. Hibernia shares were up 13 cents to $11.88.

"I think we now know why Stephen Hansel resigned," says Robert Patten, banks analyst at

UBS Warburg

, referring to the executive who this week was replaced by community banking executive and board member Herbert Boydston. "This is just another reinforcement that syndicated loans to large corporations continue to be impacted by a slowing economy and widening credit spreads. This did not surprise us in the least." Hibernia spokesman Jim Lestelle maintains that Hansel left to pursue other interests. (Patten rates Hibernia a hold and his firm has no underwriting relationship with the bank.)

No Warning?

Hibernia said it expects $55 million in fourth-quarter net charge-offs, resulting in a year-end loan loss reserve of about about $178 million. Nonperforming assets, which are loans that are past due but have not been written off yet, are expected to total about $90 million. A recent UBS Warburg analysis of banks' loan loss reserve adequacy concluded Hibernia was the second most underreserved bank, based on its loan mix among other factors.

But the announcement caught some analysts off guard, because they said the company sought to downplay the severity of problem loans as recently as the third quarter.

"In their third-quarter conference call,

management indicated in what seemed to us very strong terms that they were not going to have exceptional writedowns," says Gary Townsend, banks analyst at

Friedman Billings Ramsey

. "They were not guiding anyone to expect a provision of this level." (Townsend said his rating on Hibernia is currently under review and his firm has no underwriting relationship with the bank.)

Growing Concern

Credit deterioration has been a growing concern in the banking industry over the past year, as banks that lent freely are now feeilng the pain. A slowdown in economic growth and corporate profits has hampered the ability of many borrowers to repay credits they took on when the economy was steaming ahead. In a report released yesterday, the

Federal Deposit Insurance Corporation

said much of the credit deterioration can be explained by the "seasoning of syndicated loans underwritten from 1997 to 1998, when many banks significantly eased business lending standards."

Bank of America

(BAC) - Get Report

,

Bank One

(ONE) - Get Report

and

First Union

(FTU)

have all reported problems with bad loans this year.

And Hibernia has been dealing with credit issues since at least last year. In July 1999, the company disappointed investors and analysts when it reported that nonperforming assets had jumped substantially, to $100.5 million from the prior year's $38 million. The news stirred up the oft-talked about notion the bank was a

takeover target .

The More They Stay the Same

And analysts expect more changes. "Like

Jamie Dimon did at Bank One, the new CEO will look for the lowest common denominator," says Patten. "Anything that needs to be done by the new CEO, I hope is announced in the next four to six weeks," he said, adding that the recent announcement "clearly gets the credit issues into the fourth quarter." Hibernia's Lestelle would not elaborate on any expected changes except to say " we are still going to work on asset quality."

But Hibernia also said it expects a loan loss provision in the range of $65 million to $75 million next year, based on the current economic outlook. Analysts think the stock deserves the current low multiple it trades at compared with its peers. It currently trades at about 8.5 times estimated 2001 earnings, compared with an average 12.7 times for a peer group assembled by Townsend at Friedman Billings Ramsey. And Patten adds: "At this point, we're still not recommending investors buy just because the stock looks cheap."