Banking Industry Gains Strength Despite Real Estate Woes

Banks reported a 1.5% decline in nonperforming loans during the second quarter despite persistent concern about some real estate loans, according to data compiled by Weiss Ratings, Jupiter, Fla.

The total volume of nonperforming loans fell by $972 million during the quarter, totaling 64.8 billion at June 30 of last year. That was down 1.5% from a year earlier, according to Weiss Ratings.

But the rating agency said that the number of problem real estate loans continues to grow even as other loan categories improve.

Nonperforming commercial real estate loans increased by $543 million, or 9%, between June 30 of 2002 and June 30 of 2003, reaching a total of $6.5 billion at that time across the entire banking industry. Problem commercial real estate loans account for 10% of all nonperforming loans industrywide.

Melissa Gannon, vice president of Weiss Ratings, said high interest margins from falling interest rates during the past few years have put the banking industry on solid financial footing. And with the stock market improving, banks are making additional gains through the sale of investment products.

Ms. Gannon told MSN that the volume of nonperforming loans has declined on a year-to-year basis for three quarters, reflecting a strengthening economy.

"It's definitely the beginning of a trend. Whether that's a long-term trend, I'm not prepared to say."

But commercial real estate loans remain an area of concern because of high vacancy rates, she said. And overcapacity may slow a recovery for commercial real estate sector.

"I think that particular sector is going to continue to decline," she said. But overall, she said the bank and thrift industry is in good health, with record profits and stronger levels of capitalization compared to a year ago.

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